Question

2. Quantitative Problem: You are given the following probability distribution for CHC Enterprises: State of Economy...

2. Quantitative Problem: You are given the following probability distribution for CHC Enterprises:

State of Economy Probability Rate of return
Strong 0.25 22%
Normal 0.5 9%
Weak 0.25 -6%

- What is the stock's standard deviation? Round your answer to two decimal places. Do not round intermediate calculations.
_____%

- What is the stock's coefficient of variation? Round your answer to two decimal places. Do not round intermediate calculations.
______

5.

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 (20%)
Below average 0.2 (14)   
Average 0.3 15  
Above average 0.1 22  
Strong 0.3 70  
1.0

- Calculate the stock's coefficient of variation. Round your answer to two decimal places.

6. A stock has a required return of 9%; the risk-free rate is 4.5%; and the market risk premium is 4%.

- New stock's required rate of return will be ____%. Round your answer to two decimal places.

Homework Answers

Answer #1

Expected return = sum of (probability of state * return of state)

E(X^2) =  sum of (probability of state * return of state^2)

variance = E(X^2) - (E(X))^2

Standard deviation = sqrt(variance)

2)

State of Economy Probability of Economy(X) Rate of return
strong 0.25 22.00%
normal 0.50 9.00%
weak 0.25 -6.00%

Expected return E(X)=sum of(x*P(X))

8.50%
E(X^2) 0.01705

Variance=E(X^2)-E(X)^2

0.009825

Standard deviation=sqrt(Variance)

9.91%

coefficient of variation = std/expected return

1.17

standard deviation = 9.91

coefficient of variance = 1.17

5)

State Probability
of State (P)
Stock X (R) P*R P*R^2
weak 10% -20% -2.00% 0.40%
Below average 20% -14% -2.80% 0.39%
average 30% 15% 4.50% 0.68%
above average 10% 22% 2.20% 0.48%
strong 30% 70% 21.00% 14.70%
Sum 22.9% 16.651%

variance = 0.16651 - (0.229)^2

=  0.114069

standard deviation = sqrt(0.114069)

= 33.77%

coefficient variation = standard deviation/expected return

= 33.77/22.9

= 1.48

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