Question

Expected Return: Discrete Distribution A stock's return has the following distribution: Demand for the Company's Products...

Expected Return: Discrete Distribution

A stock's return has the following distribution:

Demand for the
Company's Products
Probability of This
Demand Occurring
Rate of Return if This
Demand Occurs (%)
Weak 0.1 -30 %
Below average 0.2 -10
Average 0.4 16
Above average 0.2 35
Strong 0.1 65
1.0

Calculate the stock’s expected return and standard deviation. Do not round intermediate calculations. Round your answers to two decimal places.

Expected return:   %

Standard deviation:   %

Homework Answers

Answer #1

Expected return=Respective return*Respective probability

=(0.1*-30)+(0.2*-10)+(0.4*16)+(0.2*35)+(0.1*65)

=14.9%

probability Return probability*(Return-Expected Return)^2
0.1 -30 0.1(-30-14.9)^2=201.601
0.2 -10 0.2*(-10-14.9)^2=124.002
0.4 16 0.4*(16-14.9)^2=0.484
0.2 35 0.2*(35-14.9)^2=80.802
0.1 65 0.1*(65-14.9)^2=251.001
Total=657.89%

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

=25.65%(Approx).

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