Question

EXPECTED RETURNS

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

Probability	A	B
0.1	(5%)	(27%)
0.2	4	0
0.3	11	19
0.2	18	29
0.2	33	48

Calculate the expected rate of return, rB, for Stock B (rA = 13.80%.) Do not round intermediate calculations. Round your answer to two decimal places.
%

Calculate the standard deviation of expected returns, ?A, for Stock A (?B = 21.72%.) 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

1.Expected return for B=Respective return*Respective probability

=(0.1*-27)+(0.2*0)+(0.3*19)+(0.2*29)+(0.2*48)=18.4%

2.

probability	Return	probability*(return-mean)^2
0.1	-5	0.1*(-5-13.8)^2=35.344
0.2	4	0.2*(4-13.8)^2=19.208
0.3	11	0.3*(11-13.8)^2=2.352
0.2	18	0.2*(18-13.8)^2=3.528
0.2	33	0.2*(33-13.8)^2=73.728
		Total=134.16%

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

=11.58%(Approx)

3.Coefficient of variation=Standard deviation/Mean

=(21.72/18.4)=1.18(Approx).