Question

In: Finance

A stock's returns have the following distribution: Demand for the Company's Products Probability of This Demand...

A stock's returns have the following distribution:

Demand for the
Company's Products
Probability of This
Demand Occurring
Rate of Return If
This Demand Occurs
Weak 0.1 (48%)
Below average 0.1 (15)   
Average 0.3 11   
Above average 0.3 40   
Strong 0.2 65   
1.0

Assume the risk-free rate is 4%. Calculate the stock's expected return, standard deviation, coefficient of variation, and Sharpe ratio. Do not round intermediate calculations. Round your answers to two decimal places.

Stock's expected return:   %

Standard deviation:   %

Coefficient of variation:

Sharpe ratio:

Solutions

Expert Solution

Expected Return =0.1*-48%+0.1*-15%+0.3*11%+0.3*40%+0.2*65%=22%
Standard Deviation =(0.1*(-48%-22%)^2+0.1*(-15%-22%)^2+0.3*(11%-22%)^2+0.3*(40%-22%)^2+0.2*(65%-22%)^2)^0.5
=33.6184% or 33.62%
Coefficient of Variation =Standard Deviation/Expected Return =33.6184%/22% =1.53
Sharpe Ratio=(Expected Return-Risk Free rate)/Standard Deviation =(22%-4%)/33.6184%=0.54


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