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 |
Calculate the stock's
expected return. Round your answer to two decimal places.
%
Calculate the stock's
standard deviation. Do not round intermediate calculations. Round
your answer to two decimal places.
%
Calculate the stock's coefficient of variation. Round your answer to two decimal places.
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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