Question

EXPECTED RETURN

A stock's returns have the following distribution:

Demand for the Company's Products	Probability of This Demand Occurring	Rate of Return If This Demand Occurs
Weak	0.2	(38%)
Below average	0.1	(6)
Average	0.3	13
Above average	0.1	26
Strong	0.3	61
	1.0

1. Calculate the stock's expected return. Round your answer to two decimal places.
   %

2. Calculate the stock's standard deviation. Do not round intermediate calculations. Round your answer to two decimal places.
   %

3. Calculate the stock's coefficient of variation. Round your answer to two decimal places.

Answer 1

Expected return=Respective return*Respective probability

=(0.2*-38)+(0.1*-6)+(0.3*13)+(0.1*26)+(0.3*61)=16.6%

probability	Return	probability*(Return-Expected Return)^2
0.2	-38	0.2*(-38-16.6)^2=596.232
0.1	-6	0.1*(-6-16.6)^2=51.076
0.3	13	0.3*(13-16.6)^2=3.888
0.1	26	0.1*(26-16.6)^2=8.836
0.3	61	0.3*(61-16.6)^2=591.408
		Total=1251.44%

Standard deviation=[Total probability*(Return-Expected Return)^2/Total probability]^(1/2)

=(1251.44)^(1/2)

=35.38%(Approx).

Coefficient of variation=Standard deviation/Expected return

=35.38/16.6

=2.13(Approx).