Question

You are given the following probability distribution for CHC Enterprises:

State of Economy. Probability. Rate of Return

Strong 0.20 19%

Normal 0.50 9

Weak 0.30 -5

What is the stock's expected return? Do not round intermediate calculations. Round your answer to two decimal places.

_%

What is the stock's standard deviation? Do not round intermediate calculations. Round your answer to two decimal places.

_%

What is the stock's coefficient of variation? Round your answer to two decimal places. Do not round intermediate calculations.

Answer #1

Expected Return of a stock with probability distribution is a weighted average of individual returns. It is calculated as (p1*r1)+(p2*r2)+(p3*r3)

= (0.2*0.19)+(0.5*0.09)+(0.3*-0.05)= 0.068= 6.80%

Standard deviation of a stock with probability distribution is calculated as: sqrt((summation(x^2*p(x)))-Mean^2)

summation(x^2*p(x))= (0.19^2*0.2)+(0.09^2*0.5)+(-0.05^2*0.3)= 0.012

Mean= 0.068

Standard Deviation= sqrt(0.012-0.068^2)= 0.086= 8.60%

Coefficient of variation is calculated as the ratio of Standard deviation to Mean.

So, the stock's coefficient of variation= 8.60%/6.80%= 1.26

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