Stocks A and B have the following probability distributions of expected future r

Question

Stocks A and B have the following probability distributions of expected future returns:

a.Calculate the expected rate of return, rB, for Stock B (rA = 10.10%.) Do not round intermediate calculations. Round your answer to two decimal places.

b.Calculate the standard deviation of expected returns, A, for Stock A (B = 20.37%.) 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.

Probability A B 0.2 (10%) (21%) 0.2 3 0 0.3 13 23 0.2 24 30 0.1 28 38

Explanation / Answer

a.expected rate of return, rB=Respective return*Respective probability

=(0.2*-21)+(0.2*0)+(0.3*23)+(0.2*30)+(0.1*38)

which is equal to

=12.5%

b.

Hence standard deviation=[Total Probability*(Return-Expected Return)^2/Total probability]^(1/2)

=(164.09)^(1/2)

=12.81%(Approx)

c. coefficient of variation for Stock B=standard deviation/expected return

=(20.37/12.5)

=1.63(Approx).

Probability Return Probability*(Return-Expected Return)^2 0.2 -10 0.2*(-10-10.1)^2=80.802 0.2 3 0.2*(3-10.1)^2=10.082 0.3 13 0.3*(13-10.1)^2=2.523 0.2 24 0.2*(24-10.1)^2=38.642 0.1 28 0.1*(28-10.1)^2=32.041 Total=164.09%

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.