Question

Stock AAA has the following probability distribution: If economy is good (the probability is 30%), its expected stock return is 30%; if economy is on average (the probability is 40%), its expected stock return is 10%; if economy is bad (the probability is 30%), its expected return is -10%. Find the expected rate of return for stock AAA

		4.0%
		6.0%
		10.0%
		14.0%

Using the data from above, find the standard deviation (risk) for stock AAA

		13.49%
		14.59%
		15.49%
		16.56%

Using the results from Question 34 and 35, calculate the coefficient of variation for stock AAA

		1.55
		1.78
		1.99
		0.65

Answer 1

Expected Return of Stock AAA =Probability of good*Expected Return of good + Probability of Average*Expected Return of Average+ Probability of bad*Expected Return of bad=30%*30%+40%*10%+30%*-10% =10% (Option c is correct option)

Standard Deviation of Stock AAA =(30%*(30%-10%)^2+40%*(10%-10%)^2+30%*(-10%-10%)^2)^0.5=15.49%(Option c is correct option)

Coefficient of Variation =Standard Deviation of Stock AAA/Expected Return of Stock AAA =15.49%/10% =1.55(Option a is correct option)