Question

1. Problem 8.01 (Expected Return) eBook A stock's returns have the following distribution: Demand for the Company's Products Weak Probability of this Demand Occurring 0.1 Rate of Return If This Demand Occurs (28%) (13) Below average Average Above average Strong 0.5 0.1 Assume the risk-free rate is 2%. Calculate the stock's expected return, standard deviation, coefficient of variation, and Sharpe ratio. Do not round intermediate calculations. Round your answers to two decimal places. Stock's expected return: Standard deviation: Coefficient of variation: Sharpe ratio:

Answer 1

Expected Return = (0.1(-0.28) + 0.1(-0.13) + 0.5(0.12) + 0.1(0.29) + 0.2(0.63)

Expected Return = 0.174

Standard Deviation = [(0.1(-0.28 - 0.174)² + 0.1(-0.13 - 0.174)² + 0.5(0.12 - 0.174)² + 0.1(0.29 - 0.174)² + 0.2(0.63 - 0.174)²)]

Standard Deviation = 0.2725

CV = 0.2725/0.174 = 1.57

Sharpe Ratio = (0.174 - 0.02)/0.2725

Sharpe Ratio = 0.57