EXPECTED RETURN A stock\'s returns have the following distribution: Calculate th

Question

EXPECTED RETURN

A stock's returns have the following distribution:

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

Calculate the stock's standard deviation. Do not round intermediate calculations. Round your answer to two decimal places.
%

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 (42%) Below average 0.1 (8)    Average 0.3 16   Above average 0.4 39   Strong 0.1 74   1.0

Explanation / Answer

Solution :- Expected return of stock = 0.1 * (-) 42 % + 0.1 * (-) 8 % + 0.3 * 16 % + 0.4 * 39 % + 0.1 * 74 %

= (-) 4.20 % + (-) 0.80 % + 4.80 % + 15.60 % + 7.40 %

= 22.80 %

Standard deviation of stock = [ 0.1 * (- 42 % - 22.80 %)2 + 0.1 * (- 8 % - 22.80 %)2 + 0.30 * (16 % - 22.80 %)2 + 0.40 * (39 % - 22.80 %)2 + 0.10 * (74 % - 22.80 %)2 ]1/2

= [ 0.1 * 4199.04 + 0.1 * 948.64 + 0.30 * 46.24 + 0.40 * 262.44 + 0.10 * 2621.44 ] 1/2

= (419.904 + 94.864 + 13.872 + 104.976 + 262.144) 1/2

= (895.76)1/2

= 29.93 % (approx).

Coefficient of variation of stock = (Standard deviation of stock / Expected return of stock) * 100

= (29.93 / 22.80) * 100

= 1.3127 * 100

= 131.27 (approx).

Conclusion :-

Expected return of stock 22.80 % Standard deviation of stock 29.93 % Coefficient of variation of stock 131.27

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