Question

An analyst has estimated how a particular stock's return will vary depending on what will happen to the economy:

State of	Probability of	Stock's Expected Return
the Economy	State Occurring	if this State Occurs
Recession	0.10	-60%
Below Average	0.20	-10
Average	0.40	15
Above Average	0.20	40
Boom	0.10	90

What is the coefficient of variation on the company's stock? (Use the population standard deviation to calculate the coefficient of variation.)

a.	2.121
b.	2.201
c.	2.472
d.	3.334
e.	3.727

Answer 1

Coefficient Of Variation = Standard Deviation/ Mean

= 37.08/15

= 2.472

Hence, the correct answer is c. 2.472

Notes:

1. Mean :

	Probability	Stock A	Expected Return ( Probability * Expected Return)
Recession	0.10	(0.60)	-0.0600
Below Average	0.20	(0.10)	-0.0200
Average	0.40	0.15	0.0600
Above Average	0.20	0.40	0.0800
Boom	0.10	0.90	0.0900
	Expected Return		0.1500
	Expected Return   %		15.00

2. Standard Deviation :

	Probability	Probable Return	Deviation ( Probable Return- Expected Return)	Deviation Squared	Product ( Deviation Squared* Probability)
Recession	10%	-60.00	-75	5625	562.5
Below Average	20%	-10.00	-25	625	125
Average	40%	15.00	0	0	0
Above Average	20%	40.00	25	625	125
Boom	10%	90.00	75	5625	562.5
			Variance		1375
			Standard Deviation		37.08