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).**

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