An investor wants to estimate the expected return on his investment in Home Depot stock. Here are the possible returns that could be earned and their probabilities of occurrence:
Possible Return Probability
12% 20%
6% 20%
-10% 20%
22% 20%
5% 20%
a) What is the expected return for Home Depot?
b) What is the variance and standard deviation?
c) What is the coefficient of variation?
i | ii | iii=i*ii | iv | ||
return | probability | expected return | (return-7%)^2*probability | ||
12% | 20% | 2.40% | 0.05% | ||
6% | 20% | 1.20% | 0.00% | ||
-10% | 20% | -2.00% | 0.58% | ||
22% | 20% | 4.40% | 0.45% | ||
5% | 20% | 1.00% | 0.01% | ||
7.00% | 1.09% | ||||
a) What is the expected return for Home Depot? | |||||
expected return = | 7.00% | ||||
b) What is the variance and standard deviation? | |||||
SD = 1.09%^0.5 | 10.43% | ||||
c) What is the coefficient of variation? | |||||
CV = SD/Mean = | =(10.43%/7%) | ||||
1.49 | |||||
OR | 149.0% |
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