Question

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

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 0.1 (46%)
Below average 0.4 (8)   
Average 0.3 16  
Above average 0.1 20  
Strong 0.1 53  
1.0

Assume the risk-free rate is 3%. Calculate the stock's expected return, standard deviation, coefficient of variation, and Sharpe ratio. Do not round intermediate calculations. Round your answers to two decimal places.

Stock's expected return: %

Standard deviation: %

Coefficient of variation:

Sharpe ratio:

Homework Answers

Answer #1

1.
Expected returns=Sum(probability*returns)
=0.1*(-46%)+0.4*(-8%)+0.3*16%+0.1*20%+0.1*53%=4.300%

2.
Standard deviation=Sqrt(Sum(probability*(returns-expected returns)^2))
=sqrt(0.1*(-46%-4.300%)^2+0.4*(-8%-4.300%)^2+0.3*(16%-4.300%)^2+0.1*(20%-4.300%)^2+0.1*(53%-4.300%)^2)
=24.828%

3.
Coefficient of variation=Standard deviation/Expected returns=24.828%/4.300%
=5.773953488

4.
=(Expected returns-risk free rate)/Standard deviation
=(4.300%-3%)/24.828%
=0.052360238

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