Question

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

Probability |
A |
B |

0.1 | (11%) | (29%) |

0.2 | 2 | 0 |

0.4 | 12 | 20 |

0.2 | 18 | 30 |

0.1 | 36 | 44 |

A. Calculate the expected rate of return, rB, for Stock B (rA =
11.30%.) Do not round intermediate calculations. Round your answer
to two decimal places.

B. Calculate the standard deviation of expected returns, σA, for
Stock A (σB = 19.43%.) Do not round intermediate calculations.
Round your answer to two decimal places.

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

Answer #1

Answer A.

Stock B:

Expected Rate of Return, rB = 0.10 * (-29%) + 0.20 * 0% + 0.40 *
20% + 0.20 * 30% + 0.10 * 44%

Expected Rate of Return, rB = 15.50%

Answer B.

Stock A:

Variance, σ^{2}A = 0.10 * (-0.11 - 0.1130)^2 + 0.20 *
(0.02 - 0.1130)^2 + 0.40 * (0.12 - 0.1130)^2 + 0.20 * (0.18 -
0.1130)^2 + 0.10 * (0.36 - 0.1130)^2

Variance, σ^{2}A = 0.013721

Standard Deviation of Return, σA = (0.013721)^2

Standard Deviation of Return, σA = 0.1171

Standard Deviation of Return, σA = 11.71%

Answer C.

Stock B:

Coefficient of Variation = Standard Deviation of Return, σB /
Expected Rate of Return, rB

Coefficient of Variation = 19.43% / 15.50%

Coefficient of Variation = 1.25

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
Calculate the expected rate of return, rB, for Stock
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B
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0.2
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0
0.3
13
23
0.2
24
30
0.1
28
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A
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0.2
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16
19
0.2
21
25
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34
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A
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(5%)
(27%)
0.2
4
0
0.3
11
19
0.2
18
29
0.2
33
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A
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(7%)
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0.2
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12
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0.2
20
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0.2
32
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A
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0.1
(8%)
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0.3
3
0
0.3
12
20
0.2
18
25
0.1
33
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13
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A
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0.3
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0.2
23
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