Question

EXPECTED RETURN A stock's returns have the following distribution: Demand for the Company's Products Probability of this Rate of Return If Demand Occurring This Demand Occurs 0.1 (26%) 0.3 (15) Weak 0.3 13 Below average Average Above average Strong 0.1 37 51 1.0 a. Calculate the stock's expected return. Round your answer to two decimal places. % lo 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

Expected return=Respective return*Respective probability

=(0.1*-26)+(0.3*-15)+(0.3*13)+(0.1*37)+(0.2*51)=10.7%

Probability	Return	Probability*(Return-Expected Return)^2
0.1	-26	0.1*(-26-10.7)^2=134.689
0.3	-15	0.3*(-15-10.7)^2=198.147
0.3	13	0.3*(13-10.7)^2=1.587
0.1	37	0.1*(37-10.7)^2=69.169
0.2	51	0.2*(51-10.7)^2=324.818
		Total=728.41%

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

=(728.41)^(1/2)

=26.99%(Approx)

Coefficient of variation=Standard deviation/Expected return

=26.99/10.7

=2.52(Approx)