Homework SourseEXPECTED RETURNS Stocks A and B have the following probabili
EXPECTED RETURNS
Stocks A and B have the following probability distributions of expected future returns:
Calculate the expected rate of return, rB, for Stock B (rA = 11.80%.) Do not round intermediate calculations. Round your answer to two decimal places.
%
Calculate the standard deviation of expected returns, ?A, for Stock A (?B = 21.07%.) Do not round intermediate calculations. Round your answer to two decimal places.
%
Now calculate the coefficient of variation for Stock B. Round your answer to two decimal places.
| Probability | A | B |
| 0.1 | (6%) | (38%) |
| 0.3 | 6 | 0 |
| 0.3 | 10 | 19 |
| 0.2 | 24 | 29 |
| 0.1 | 28 | 40 |
Solution
Expected return for Stock B=(0.1*(-38%)+0.3*0%+0.3*19%+0.2*29%+0.1*40%)=11.7%
Standard Deviation for Stock A=sqrt(0.1*(-6%-11.8%)^2+0.3*(6%-11.8%)^2+0.3*(10%-11.8%)^2+0.2*(24%-11.8%)^2+0.1*(28%-11.8%)^2)=9.9378%
Coefficient of Variation for Stock B=Standard Devaition for Stock B/Expected Returns for Stock B=21.07%/11.7%=1.800855
