Question

Jeff Inc.’s stock has a 50% chance of producing a 45% return, a 50% chance of producing a -12.5% return. What is the coefficient of variation(CV) of this stock?

Answer 1

Expected return=Respective return*Respective probability

=(0.5*45)+(0.5*-12.5)

=16.25%

Probability	Return	Probability*(Return-Expected Return)^2
0.5	45	0.5*(45-16.25)^2=413.28125
0.5	-12.5	0.5*(-12.5-16.25)^2=413.28125
		Total=826.5625%

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

=(826.5625)^(1/2)

which is equal to

=28.75%

Coefficient of variation=Standard deviation/Expected return

=28.75/16.25

which is equal to

=1.77(Approx).