Question

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.

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