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               (22%)

Below average 0.1 (8)

Average 0.5 11

Above average 0.2 27

Strong 0.1 45

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

Calculate the stock's standard deviation. Do not round intermediate calculations. Round your answer to two decimal places.

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

Answer 1

Expected Return = 0.10 * (-0.22) + 0.10 * (-0.08) + 0.50 * 0.11 + 0.20 * 0.27 + 0.10 * 0.45
Expected Return = 0.124
Expected Return = 12.40%

Variance = 0.10 * (-0.22 - 0.124)^2 + 0.10 * (-0.08 - 0.124)^2 + 0.50 * (0.11 - 0.124)^2 + 0.20 * (0.27 - 0.124)^2 + 0.10 * (0.45 - 0.124)^2
Variance = 0.030984

Standard Deviation = (0.030984)^(1/2)
Standard Deviation = 0.1760
Standard Deviation = 17.60%

Coefficient of Variation = Expected Return / Standard Deviation
Coefficient of Variation = 0.1240 / 0.1760
Coefficient of Variation = 0.70