Question

1) A stock's returns have the following distribution:

Demand for the Company's Products	Probability of This Demand Occurring	Rate of Return If This Demand Occurs
Weak	0.1	(36%)
Below average	0.4	(8)
Average	0.3	15
Above average	0.1	25
Strong	0.1	60
	1.0

a. Calculate the stock's expected return. Round your answer to two decimal places.
_______%

b. Calculate the stock's standard deviation. Do not round intermediate calculations. Round your answer to two decimal places.
_______%

c. Calculate the stock's coefficient of variation. Round your answer to two decimal places.

_______%

Answer 1

a.Expected Return=Respective Return*Respective Probability

=(0.1*-36)+(0.4*-8)+(0.3*15)+(0.1*25)+(0.1*60)

=6.2%

b.

Probability	Return	Probability*(Return-Expected Return)^2
0.1	-36	0.1*(-36-6.2)^2=178.084
0.4	-8	0.4*(-8-6.2)^2=80.656
0.3	15	0.3*(15-6.2)^2=23.232
0.1	25	0.1*(25-6.2)^2=35.344
0.1	60	0.1*(60-6.2)^2=289.444
		Total=606.76%

Standard deviation=[Total Probability*(Return-Expected Return)^2/Total probability]^(1/2)

=(606.76)^(1/2)

which is equal to

=24.63%(Approx)

Coefficient of variation=Standard Deviation/Expected Return

=(24.63/6.2)

which is equal to

=3.97(Approx).