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: Probability A B 0.2 (6%) (29%) 0.2 5 0 0.3 16 21 0.2 19 27 0.1 32 48

a.Calculate the expected rate of return, rB, for Stock B (rA = 11.60%.) 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 = 23.71%.) 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.

Explanation / Answer

Expected return of A = 11.60%

Standard deviation of A = 11.36%

coefficient of variation = 11.36/11.6 = 0.98

Expected return of B = 10.70%

Standard dev of B = 23.71%

Coeff of variation = 23.71/10.7 = 2.22

p(x) return p*x p*(x - mean)^2 0.2 -6.00% -0.012 0.006195 0.2 5.00% 0.01 0.000871 0.3 16.00% 0.048 0.000581 0.2 19.00% 0.038 0.001095

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