Question

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

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.

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%

Stock A:

Variance, σ2A = 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, σ2A = 0.013721

Standard Deviation of Return, σA = (0.013721)^2
Standard Deviation of Return, σA = 0.1171
Standard Deviation of Return, σA = 11.71%

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

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