Question

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	(30%)
Below average	0.2	(14)
Average	0.3	17
Above average	0.3	26
Strong	0.1	51
	1.0

Assume the risk-free rate is 2%. 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:

Answer 1

Below is the calculation of Mean and Standard deviation:

States	Probability	Stock	Probability Weighted Return	P(X - Expected return of M)^2
Weak	0.1	-30.00%	0.1x-30%=-3%	0.1(-0.3-0.122)^2=1.78084%
Below Average	0.2	-14.00%	0.2x-14%=-2.8%	0.2(-0.14-0.122)^2=1.37288%
Average	0.3	17.00%	0.3x17%=5.1%	0.3(0.17-0.122)^2=0.06912%
Above Average	0.3	26.00%	0.3x26%=7.8%	0.3(0.26-0.122)^2=0.57132%
Strong	0.1	51.00%	0.1x51%=5.1%	0.1(0.51-0.122)^2=1.50544%
Expected Return = sum of Probability Weighted Return	12.200%
Variance= sum of P(X - Expected return of M)^2	6.40%
Standard deviation = Square root of variance	25.30%