A stock\'s returns have the following distribution: Demand for the Company\'s Pr
ID: 2614702 • Letter: A
Question
A stock's returns have the following distribution: Demand for the Company's Products Probability of This Demand Occurring Rate of Return
If This Demand Occurs
Weak 0.1 (24%)
Below average 0.1 (14)
Average 0.3 17
Above average 0.1 33
Strong 0.4 54
1.0
1. Calculate the stock's expected return. Round your answer to two decimal places.
2. % Calculate the stock's standard deviation. Do not round intermediate calculations. Round your answer to two decimal places.
3. % Calculate the stock's coefficient of variation. Round your answer to two decimal places.
Explanation / Answer
Scenario
Rate of Return (Ri)
Probability (Pi)
Expected Return E(r) =Pi * E
(Ri – E(r))^2 * Pi
Weak
-24
0.1
-2.4
252.004
Below Average
-14
0.1
-1.4
161.604
Average
17
0.3
5.1
25.392
Above Average
33
0.1
3.3
4.624
Strong
54
0.4
21.6
309.136
26.2
752.76
a) Expected Return
= Sum of (Ri * Pi)
= 26.2
b) Standard Deviation
= Square Root of {(Ri – Er) ^2 * Pi)
= Square Root of (752.76)
= 27.43
c) Coefficient of Variation
= Standard Deviation / Expected Return
= 27.43 / 26.2
= 1.046
Scenario
Rate of Return (Ri)
Probability (Pi)
Expected Return E(r) =Pi * E
(Ri – E(r))^2 * Pi
Weak
-24
0.1
-2.4
252.004
Below Average
-14
0.1
-1.4
161.604
Average
17
0.3
5.1
25.392
Above Average
33
0.1
3.3
4.624
Strong
54
0.4
21.6
309.136
26.2
752.76
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