Question

Problem 8-1
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	0.1	-32%
Below average	0.2	-5
Average	0.3	15
Above average	0.2	27
Strong	0.2	71

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

b.Calculate the stock's standard deviation. Round your answer to two decimal places.

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

Answer 1

Expected return=Respective return*Respective probability

=(0.1*-32)+(0.2*-5)+(0.3*15)+(0.2*27)+(0.2*71)=19.9%

probability	Return	probability*(return-mean)^2
0.1	-32	0.1*(-32-19.9)^2=269.361
0.2	-5	0.2*(-5-19.9)^2=124.002
0.3	15	0.3*(15-19.9)^2=7.203
0.2	27	0.2*(27-19.9)^2=10.082
0.2	71	0.2*(71-19.9)^2=522.242
		Total=932.89%

Standard deviation=[Total probability*(return-mean)^2/Total probability]^(1/2)

=30.54%(Approx)

Coefficient of variation=Standard deviation/Expected return

=(30.54/19.9)

which is equal to

=1.53(Approx).