Question

Cell for "2" State of the Economy Return on Probability Treasury of Bond in Occurrence Upcoming Year Worst case Poor case Most likely Good case Best case 0.10 0.20 0.40 0.20 0.10 1.00 -0.34 -0.04 0.06 0.16 0.26 Expected return Variance STDEV CV 0.04000 0.02360 0.15362 3.84057 You were provided with the above information about T-bills. Answer the following questions in the paces provided: 1. What does the expected return represent, and how is it calculated? 2. What does STDEV represent? 3. What is the significance of the coefficient of variation? How is it calculated

Answer 1

1]

The expected return represents the mean, or expected value of the probability distribution of the bond returns. It is calculated by multiplying the potential returns by the probability of each return occurring, and then calculating the sum of those results.

2]

STDEV represents the standard deviation, or volatility of the expected return.

3]

Coefficient of variation is a measure of dispersion of a probability distribution. It is useful for comparing different data series. It is calculated as the ratio of the standard deviation to the expected return.

Coefficient of variation = STDEV / expected return.