A stock\'s return had the following distribution: Demand for the Company\'s Prod
ID: 2726733 • Letter: A
Question
A stock's return had the following distribution:
Demand for the Company's Products Probability of this Demand Occurring Rate of Return If this Demand Occurs %
Weak 0.1 -50%
Below Average 0.2 -5
Average 0.4 16
Above Average 0.2 25
Strong 0.1 60
1.0
Explanation / Answer
Calculate the stock’s expected return.
= (0.1)(-50%) + (0.2)(-5%) + (0.4)(16%) + (0.2)(25%) + (0.1)(60%)
= 11.40%.
2.Calculate the standard deviation.
s2 = (-50% – 11.40%)2(0.1) + (-5% – 11.40%)2(0.2) + (16% – 11.40%)2(0.4)
+ (25% – 11.40%)2(0.2) + (60% – 11.40%)2(0.1)
s2 = 712.44; s = 26.69%.
3.Calculate the stock’s coefficient of variation.
CV = SD/ER
CV =26.69/11.40= 2.34.
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