Question

Click here to read the eBook: Stand-Alone Risk

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	(26%)
Below average	0.1	(7)
Average	0.3	14
Above average	0.1	20
Strong	0.3	53
	1.0

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

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

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

Answer 1

Expected return=Respective return*Respective probability

=(0.2*-26)+(0.1*-7)+(0.3*14)+(0.1*20)+(0.3*53)=16.2%

probability	Return	probability*(Return-Expected Return)^2
0.2	-26	0.2*(-26-16.2)^2=356.168
0.1	-7	0.1*(-7-16.2)^2=53.824
0.3	14	0.3*(14-16.2)^2=1.452
0.1	20	0.1*(20-16.2)^2=1.444
0.3	53	0.3*(53-16.2)^2=406.272
		Total=819.16%

Standard deviation=[Total probability*(Return-Expected Return)^2/Total probability]^(1/2)

=28.62%(Approx).

Coefficient of variation=Standard Deviation/Expected Return

=(28.62/16.2)=1.77(Approx).