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: Probability 0.1 0.2 0.4 0.2 0.1 (1590) (28%) 16 24 38 21 28 37 a. Calculate the expected rate of return, rB, for Stock B (TA-14.10%.) Do not round intermediate calculations. Round your answer to two decimal places b. Calculate the standard deviation of expected returns, for Stock A (OB = 18.07%.) Do not round intermediate calculations Round your answer to two decimal places c. Now calculate the coefficient of variation for Stock B. Round your answer to two decimal places

Explanation / Answer

a)

Expected return of stock B = 0.1*(-0.28) + 0.2*0 + 0.4*0.21 + 0.2*0.28 + 0.1*0.37

Expected return of stock B = -0.028 + 0 + 0.084 + 0.056 + 0.037

Expected return of stock B = 0.149 or 14.9%

b)

Standard deviation = [ 0.1 ( -0.28 - 0.149)2 + 0.2 ( 0 - 0.149)2 + 0.4 ( 0.21 - 0.149)2 + 0.2 ( 0.28 - 0.149)2 + 0.1 ( 0.37 - 0.149)2]1/2

Standard deviation = [ 0.018404 + 0.00444 + 0.001488 + 0.003432 + 0.004884 ]1/2

Standard deviation = 0.1807 or 18.07%

c)

Coefficient of variation = Standard devtaion / mean

Coefficient of variation = 0.1807 / 0.149

Coefficient of variation = 1.21

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