Question

State of Economy | Probability | Rate of return |

Strong | 0.25 | 19% |

Normal | 0.5 | 8 |

Weak | 0.25 | -4 |

What is the stock's expected return? Round your answer to 2
decimal places. Do not round intermediate calculations.

___________%

What is the stock's standard deviation? Round your answer to two
decimal places. Do not round intermediate calculations.

___________%

What is the stock's coefficient of variation? Round your answer to two decimal places. Do not round intermediate calculations.

___________

Answer #1

1)

Expected return = Probabilities * returns

Expected return = 0.25*0.19 + 0.5*0.08 + 0.25*(-0.04)

Expected return = 0.0475 + 0.04 - 0.01

**Expected return = 0.0775 or 7.75%**

2)

Standard deviation = [0.25(0.19 - 0.0775)^2 + 0.5(0.08 - 0.0775)^2 + 0.25(-0.04 - 0.0775)^2]^1/2

Standard deviation = [0.003164 + 0.000003 + 0.003452]^1/2

**Standard deviation = 0.0814 or 8.14%**

3)

coefficient of variation = Standard deviation / return

coefficient of variation = 0.0814 / 0.0775

**coefficient of variation = 1.05**

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