Question

EXPECTED RETURN A stock's returns have the following distribution: Demand for the Company's Products Probability of...

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.

Homework Answers

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).

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