Question

EXPECTED RETURN

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	0.2	(44%)
Below average	0.1	(6)
Average	0.5	17
Above average	0.1	21
Strong	0.1	64
	1.0

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=Respective return*Respective probability

=(0.2*-44)+(0.1*-6)+(0.5*17)+(0.1*21)+(0.1*64)=7.6%

probability	Return	probability*(Return-Mean)^2
0.2	-44	0.2*(-44-7.6)^2=532.512
0.1	-6	0.1*(-6-7.6)^2=18.496
0.5	17	0.5*(17-7.6)^2=44.18
0.1	21	0.1*(21-7.6)^2=17.956
0.1	64	0.1*(64-7.6)^2=318.096
		Total=931.24%

Standard deviation=[Total probability*(Return-Mean)^2/Total probability]^(1/2)
=30.52%(Approx)

Coefficient of variation=Standard deviation/expected value

=(30.52/7.6)=4.02(Approx).