A stock\'s return has the following distribution: Calculate the stock\'s expecte
ID: 2621985 • Letter: A
Question
A stock's return has the following distribution:
Calculate the stock's expected return and standard deviation
Demand for the Company's Product
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
Demand for the Company's Product
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
Expected return = summation( probability*return)
= 0.1*(-50) + 0.2*(-5)+0.4*(16)+0.2*25+0.1*60 = 11.4 %
Standard deviation = square root of summation( probability*(return-expected return)^2)
= sqrt{ 0.1*(-50-11.4)^2 + 0.2*(-5-11.4)^2 +0.4*(16-11.4)^2+0.2*(25-11.4)^2+0.1*(60-11.4)^2 }
= 26.69 %
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