Question

Calculate the stock’s expected return, variance and standard deviation.

Demand for the Company’s Products	Probability of This Demand Occurring	Rate of Return if This Demand Occurs
Weak	0.15	(30%)
Below average	0.20	(3%)
Average	0.35	18%
Above average	0.20	25%
Strong	0.10	31%

Answer 1

Expected return=Respective return*Respective probability

=(0.15*-30)+(0.2*-3)+(0.35*18)+(0.2*25)+(0.1*31)=9.3%

probability	Return	probability*(Return-Expected Return)^2
0.15	-30	0.15*(-30-9.3)^2=231.6735
0.2	-3	0.2*(-3-9.3)^2=30.258
0.35	18	0.35*(18-9.3)^2=26.4915
0.2	25	0.2*(25-9.3)^2=49.298
0.1	31	0.1*(31-9.3)^2=47.089
		Total=384.81%

Standard deviation=[Total probability*(Return-Expected Return)^2/Total probability]^(1/2)

=(384.81)^(1/2)

=19.62%(Approx).

Variance=Standard deviation^2

=384.81%(Approx).