EXPECTED RETURNS Stocks A and B have the following probability distributions of

Question

EXPECTED RETURNS

Stocks A and B have the following probability distributions of expected future returns:

Calculate the expected rate of return, rB, for Stock B (rA = 13.80%.) Do not round intermediate calculations. Round your answer to two decimal places.
%

Calculate the standard deviation of expected returns, ?A, for Stock A (?B = 21.72%.) Do not round intermediate calculations. Round your answer to two decimal places.
%

Now calculate the coefficient of variation for Stock B. Round your answer to two decimal places.

Probability A B 0.1 (5%) (27%) 0.2 4 0 0.3 11 19 0.2 18 29 0.2 33 48

Explanation / Answer

1.Expected return for B=Respective return*Respective probability

=(0.1*-27)+(0.2*0)+(0.3*19)+(0.2*29)+(0.2*48)=18.4%

2.

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

=11.58%(Approx)

3.Coefficient of variation=Standard deviation/Mean

=(21.72/18.4)=1.18(Approx).

probability Return probability*(return-mean)^2 0.1 -5 0.1*(-5-13.8)^2=35.344 0.2 4 0.2*(4-13.8)^2=19.208 0.3 11 0.3*(11-13.8)^2=2.352 0.2 18 0.2*(18-13.8)^2=3.528 0.2 33 0.2*(33-13.8)^2=73.728 Total=134.16%

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