Question

The current price of CRZY shares is €50. Over the coming year, there is a 40% probability that share returns will be 10%, a 40% probability that share returns will be 12.5%, and a 20% probability that share returns will be 30%. What is CRZY’s expected return and standard deviation of returns for the coming year? Would you buy it?

Answer 1

Calculation of expected return and variance of CRZY is tabulated below
		Calculation for expected return	Calculation for variance
Probability(P)	Expected Return(x)	P(x) = (P*x)	P*((x-expected return)^2)*100
0.4	10.0%	4.00%	10.00%
0.4	12.5%	5.00%	2.50%
0.2	30.0%	6.00%	45.00%
		15.00%	57.50%
	Expected Return =	15%
	Standard deviation =	Square root of Variance = √57.5 = 7.58%
Hence CRZY has expected return of 15% with Standard deviation of 7.58%. Yes we should buy it as it provide higher return with average standard deviation