Problem 8-1 Expected return A stock\'s returns have the following distribution:

Question

Problem 8-1
Expected return

A stock's returns have the following distribution:

a.Calculate the stock's expected return. Round your answer to two decimal places.

b.Calculate the stock's standard deviation. Round your answer to two decimal places.

c.Calculate the stock's coefficient of variation. Round your answer to two decimal places.

Demand for the
Company's Products Probability of This
Demand Occurring Rate of Return If
This Demand Occurs Weak 0.1 -32% Below average 0.2 -5    Average 0.3 15   Above average 0.2 27   Strong 0.2 71  

Explanation / Answer

Expected return=Respective return*Respective probability

=(0.1*-32)+(0.2*-5)+(0.3*15)+(0.2*27)+(0.2*71)=19.9%

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

=30.54%(Approx)

Coefficient of variation=Standard deviation/Expected return

=(30.54/19.9)

which is equal to

=1.53(Approx).

probability Return probability*(return-mean)^2 0.1 -32 0.1*(-32-19.9)^2=269.361 0.2 -5 0.2*(-5-19.9)^2=124.002 0.3 15 0.3*(15-19.9)^2=7.203 0.2 27 0.2*(27-19.9)^2=10.082 0.2 71 0.2*(71-19.9)^2=522.242 Total=932.89%

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