Question

An analyst has determined that a particular stock's return will vary depending on what will happen to the economy. Utilizing the information below, what is the coefficient of variation of the company's stock? STATE OF THE ECONOMY PROBABILITY OF STATE OCCURRING STOCKS EXPECTED RETURN IF THIS STATE OCCURS Recession .10 (35) Below Average .20 (20) Average .40 15 Above Average .20 40 Boom .10 90

Answer 1

Solution :

The coefficient of variation of the company's stock = 2.2183

= 2.22 ( when rounded off to two decimal places)

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.

03.11.2019 Microsoft Excel FILE HOME INSERT PAGE LAYOUT FORMULAS DATA REVIEW VIEW A D E G Н Expected Return and Variance of the Stock Stocks Expected Mean Return % Deviation % = D 1 Probability of state (D) State of the (D) Variance economy occurring Return if this (p) state occurs 2 (5) (3)-(4) (6) (5)2 (7) (2) (6) Thus Mean Return of the stock 15.50 % (1) (2) (3) (4)(2) * (3) 3 Variance of the stock (os )= 1182.2500 Recession 4 0.10 -35 -3.5 -50.50 2550.25 255.0250 Below average 5 0.20 -20 -4 -35.50 1260.25 252.0500 Average 0.25 0.1000 6 0.40 15 6 -0.50 Above average 24.50 600.25 7 0.20 40 8 120.0500 Strong 74.50 555.0250 Standard Deviation of the stock Square root of variance of the stock 8 0.10 90 5550.25 (p* (Ds))=(a,)2= Standard Deviation of the stock = SQRT(H9) o = 34.3839 % 15.50% 2 1182.2500 9 10 11 12 The Co-efficient of variation of the stock is calculated as follows: Coefficient variation (Standard Deviation/Mean) 13 (34.3839/15.50) 14 15 2.2183 16 The Co-efficient of variation of the stock is = 2.2183 17 18 =2.22 (when rounded off to two decimal places) 19 20