Question

Expected Return: Discrete Distribution

A stock's return has the following distribution:

Demand for the Company's Products	Probability of This Demand Occurring			Rate of Return if This Demand Occurs (%)
Weak		0.1		-50%
Below average		0.2		-6
Average		0.4		9
Above average		0.2		30
Strong		0.1		75
		1.0

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

Calculate the standard deviation. Round your answer to two decimal places.
%

Answer 1

stock expected return = sum of (porbability* return)

=> (0.10*-0.5) + (0.20*-0.06) + (0.40*0.09) + (0.20*0.30) + (0.10*0.75)

=>(-0.05) + (-0.012) + (0.036) + (0.06)+ (0.075)

=>0.109

=>10.9%.

standard deviation;

sum of [probability * ( return -expected return)]^(1/2)

=>[[(0.10)*(-0.50-0.109)^2]+[(0.20)*(-0.06-0.109)^2]+[0.40*(0.09-0.109)]+[0.20*(0.30-0.109)^2]+[0.10*(0.75-0.109)^2]^(1/2)

=>[0.10*(0.370881)+0.20*(0.028561)+0.40*(0.000361)+0.20*(0.036481)+0.10*0.410881]^(1/2)

=>[0.091329]^(1/2)

=>0.3022

=>30.22%.