Question

Stocks A and B have the following probability distributions of expected future returns:

Now calculate the coefficient of variation for Stock B. Round your answer to two decimal places.

Probability	A	B
0.1	-13%	-36%
0.2	6	0
0.4	15	20
0.2	18	25
0.1	40	47

Answer 1

Expected rate=Respective Return*Respective probability

=(0.1*-36)+(0.2*0)+(0.4*20)+(0.2*25)+(0.1*47)=14.1%

probability	Return	probability*(Return-Expected Return)^2
0.1	-36	0.1*(-36-14.1)^2=251.001
0.2	0	0.2*(0-14.1)^2=39.762
0.4	20	0.4(20-14.1)^2=13.924
0.2	25	0.2*(25-14.1)^2=23.762
0.1	47	0.1*(47-14.1)^2=108.241
		Total=436.69%

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

=20.90%(Approx).

Coefficient of variation=Standard deviation/Expected Return
=(20.9/14.1)

=1.48(Approx).