Question

EXPECTED RETURNS

Stocks A and B have the following probability distributions of expected future returns:

Probability	A	B
0.1	(12%)	(20%)
0.2	6	0
0.4	16	19
0.2	21	25
0.1	34	41

Calculate the expected rate of return, rB, for Stock B (rA = 14.00%.) Do not round intermediate calculations. Round your answer to two decimal places.
%

Calculate the standard deviation of expected returns, ?A, for Stock A (?B = 16.17%.) Do not round intermediate calculations. Round your answer to two decimal places.
%

Now calculate the coefficient of variation for Stock B. Round your answer to two decimal places.

Answer 1

Ans 1) Retunn of stock will be given by following formula:

return of A = summation of( pobablity * return of stock)

= (.1*-.12 + .2*.06 + .4*.16 + .2*.21 + .1*.34)

= 14%

similarly we will find return of B

= .1*-.2 + .2*0 + .4*.19 + .2*.25 + .1*.41

= 14.7%

Ans 2) to find standard devaation we will use following formula

= squareroot of (summation (probablity * (return at probablity - expected rate of return)^2))

Standard deviation of A = 11.48%

Standard deviation of B = 16.17%

Ans c) Coefficient o variation of stock B = standard deviation of B / expected rate of return of B

= 16.17%/14.7%

= 1.1