Question

EXPECTED RETURNS

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

Probability	A	B
0.1	(7%)	(28%)
0.3	2	0
0.3	12	18
0.2	20	25
0.1	39	37

1. Calculate the expected rate of return, r_B, for Stock B (r_A = 11.40%.) Do not round intermediate calculations. Round your answer to two decimal places.
   %

2. Calculate the standard deviation of expected returns, σ_A, for Stock A (σ_B = 17.60%.) Do not round intermediate calculations. Round your answer to two decimal places.
   %

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

Answer 1

a.Expected return=Respective return*Respective probability

=(0.1*-28)+(0.3*0)+(0.3*18)+(0.2*25)+(0.1*37)=11.3%

b.

Probability	Return	Probability*(Return-Expected Return)^2
0.1	-7	0.1*(-7-11.4)^2=33.856
0.3	2	0.3*(2-11.4)^2=26.508
0.3	12	0.3*(12-11.4)^2=0.108
0.2	20	0.2*(20-11.4)^2=14.792
0.1	39	0.1*(39-11.4)^2=76.176
		Total=151.44%

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

=12.31%(Approx).

c.Coefficient of variation=Standard deviation/Expected return

=(17.6/11.3)=1.56(Approx).