Click here to read the eBook: Measuring Risk for Discrete Distributions Problem
ID: 2777794 • Letter: C
Question
Click here to read the eBook: Measuring Risk for Discrete Distributions
Problem 6-5
Expected Return: Discrete Distribution
A stock's return has the following distribution:
Calculate the stock's expected return. Round your answer to two decimal places.
%
Calculate the standard deviation. Round your answer to two decimal places.
%
Company's Products Probability of This
Demand Occurring Rate of Return if This
Demand Occurs (%) Weak 0.1 -40% Below average 0.2 -9 Average 0.4 9 Above average 0.2 30 Strong 0.1 60 1.0
Explanation / Answer
Calculation of stock's expected return:
Demand
Probability
Rate of Return
Expected Return %
A
B
A*B
Weak
0.1
-40%
-4.00%
Below average
0.2
-9%
-1.80%
Average
0.4
9%
3.60%
Above average
0.2
30%
6.00%
Strong
0.1
60%
6.00%
Stock's expected return=
9.80%
Calculation of standard deviation:
Demand
Rate of Return
Expected Return
Deviation
Deviation ^2
Probability
D*E
A
B
C=A-B
D = C*C
E
Weak
-40%
9.80%
-49.80%
24.80%
0.1
2.48%
Below average
-9%
9.80%
-18.80%
3.53%
0.2
0.71%
Average
9%
9.80%
-0.80%
0.01%
0.4
0.00%
Above average
30%
9.80%
20.20%
4.08%
0.2
0.82%
Strong
60%
9.80%
50.20%
25.20%
0.1
2.52%
Variance
6.53%
Standard Deviation = Variance ^(1/2)
25.55%
Calculation of stock's expected return:
Demand
Probability
Rate of Return
Expected Return %
A
B
A*B
Weak
0.1
-40%
-4.00%
Below average
0.2
-9%
-1.80%
Average
0.4
9%
3.60%
Above average
0.2
30%
6.00%
Strong
0.1
60%
6.00%
Stock's expected return=
9.80%
Calculation of standard deviation:
Demand
Rate of Return
Expected Return
Deviation
Deviation ^2
Probability
D*E
A
B
C=A-B
D = C*C
E
Weak
-40%
9.80%
-49.80%
24.80%
0.1
2.48%
Below average
-9%
9.80%
-18.80%
3.53%
0.2
0.71%
Average
9%
9.80%
-0.80%
0.01%
0.4
0.00%
Above average
30%
9.80%
20.20%
4.08%
0.2
0.82%
Strong
60%
9.80%
50.20%
25.20%
0.1
2.52%
Variance
6.53%
Standard Deviation = Variance ^(1/2)
25.55%
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.