Question

Expected Return: Discrete Distribution A stock's return has the following distribution: Demand for the Probability of this Company's Products Demand Occurring Weak 0.1 Below average Average 0.4 Above average 0.2 Strong Rate of Return if This Demand Occurs (%) -30% 0.2 30 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:

Answer 1

Expected return=Respective return*Respective probability

=(0.1*-30)+(0.2*-7)+(0.4*5)+(0.2*30)+(0.1*75)

=11.1%

Probability	Return	Probability*(Return-Expected return)^2
0.1	-30	0.1*(-30-11.1)^2=168.921
0.2	-7	0.2*(-7-11.1)^2=65.522
0.4	5	0.4*(5-11.1)^2=14.884
0.2	30	0.2*(30-11.1)^2=71.442
0.1	75	0.1*(75-11.1)^2=408.321
		Total=729.09%

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

=(729.09)^(1/2)

=27.00%(Approx)