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, 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%

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