Question

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	-26%
Below average	0.1	-13
Average	0.4	12
Above average	0.1	35
Strong	0.3	45
	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

=(0.1*-26)+(0.1*-13)+(0.4*12)+(0.1*35)+(0.3*45)=17.9%

probability	Return	probability*(Return-Expected Return)^2
0.1	-26	0.1*(-26-17.9)^2=192.721
0.1	-13	0.1*(-13-17.9)^2=95.481
0.4	12	0.4*(12-17.9)^2=13.924
0.1	35	0.1*(35-17.9)^2=29.241
0.3	45	0.3*(45-17.9)^2=220.323
		Total=551.69%

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

=23.49%(Approx).

Coefficient of variation=Standard Deviation/Expected Return

=(23.49/17.9)=1.31(Approx).