Stocks A and B have the following probability distributions of expected future r
ID: 2818255 • Letter: S
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 38Explanation / 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%