Question 1 - Coefficient of variation [2 points]: Roenfeld Corp believes the fol

Question

Question 1 - Coefficient of variation [2 points]: Roenfeld Corp believes the following probability distribution exists for its stock. What is the coefficient of variation on the company's stock?

                                                                Probability                      Stock's

                        State of                              of State                       Expected

                        the Economy                    Occurring                     Return

                        Boom                                   0.45                             25%

                        Normal                                 0.50                             15%

                        Recession                             0.05                              5%

Explanation / Answer

State of the economy

Probability (P)

Expected Return (X) in %

P * X

X-Mean

Square of (X-Mean)

P * Square of (X- Mean)

Boom

0.45

25

11.25

6

36

16.2

Normal

0.50

15

7.5

-4

16

8

Recession

0.05

5

0.25

-14

196

9.8

Summation

19

248

34

Mean =Summation of Probability * Return = 19%
Thus, Variance= Summation of[P * Square of (X-Mean)]= 34
Hence, Standard Deviation= Square root of Variance = 5.83%
Coefficient of Variation= (Standard Deviation / Mean) * 100= (5.83% / 19%) * 100 = 30.68

State of the economy

Probability (P)

Expected Return (X) in %

P * X

X-Mean

Square of (X-Mean)

P * Square of (X- Mean)

Boom

0.45

25

11.25

6

36

16.2

Normal

0.50

15

7.5

-4

16

8

Recession

0.05

5

0.25

-14

196

9.8

Summation

19

248

34

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