Question

Expected Return: Discrete Distribution

A stock's return has the following distribution:

Demand for the Company's Products	Probability of This Demand Occurring			Rate of Return if This Demand Occurs (%)
Weak		0.1		-35	%
Below average		0.2		-5
Average		0.4		18
Above average		0.2		30
Strong		0.1		70
		1.0

Calculate the stock’s expected return and standard deviation. Do not round intermediate calculations. Round your answers to two decimal places.

Expected return:   %

Standard deviation:   %

Answer 1

State	Probability (P)	Return(%)	P*Return	Deviation form expected return (D)	PD^2
Weak	0.10	-35	(3.50)	-50.7	257.05
Below average	0.20	-5	(1.00)	-20.7	85.70
Average	0.40	18	7.20	2.3	2.12
Above average	0.20	30	6.00	14.3	40.90
Strong	0.10	70	7.00	54.3	294.85

Expected Return =P*Return

= -3.5-1+7.2+6+7

= 15.70%

Variance = PD^2

= 257.05+85.7+2.12+40.9+294.85

= 680.62

Standard Deviation = Variance

= 680.62

= 26.09%