Question

The coefficient of variation is a better measure of stand-alone risk than standard deviation because it is a standardized measure of risk per unit; it is calculated as the -Select-correlation coefficientrisk premiumstandard deviationCorrect 5 of Item 1 divided by the expected return. The coefficient of variation shows the risk per unit of return, so it provides a more meaningful risk measure when the expected returns on two alternatives are not -Select-identicaldifferentcorrelatedCorrect 6 of Item 1.

The Sharpe ratio compares the asset's realized excess return to its -Select-coefficient of variationstandard deviationaverage returnCorrect 7 of Item 1 over a specified period. Excess returns measure the amount that investment returns are above the risk-free rate — so investments with returns equal to the risk-free rate will have a -Select-positivenegativezeroCorrect 8 of Item 1 Sharpe ratio. It follows that over a given time period, investments with -Select-higherlowerCorrect 9 of Item 1 Sharpe ratios performed better, because they generated higher -Select-higherlowerCorrect 10 of Item 1 excess returns per unit of risk. The Sharpe ratio is calculated as:

Quantitative Problem: You are given the following probability distribution for CHC Enterprises:

State of Economy	Probability	Rate of return
Strong	0.25	19	%
Normal	0.55	8	%
Weak	0.20	-5	%

What is the stock's expected return? Do not round intermediate calculations. Round your answer to two decimal places.

%

What is the stock's standard deviation? Do not round intermediate calculations. Round your answer to two decimal places.

%

What is the stock's coefficient of variation? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

The coefficient of variation is a better measure of stand-alone risk than standard deviation because it is a standardized measure of risk per unit; it is calculated as the standard deviation divided by the expected return. The coefficient of variation shows the risk per unit of return, so it provides a more meaningful risk measure when the expected returns on two alternatives are not identical

The Sharpe ratio compares the asset's realized excess return to its standard deviation over a specified period. Excess returns measure the amount that investment returns are above the risk-free rate — so investments with returns equal to the risk-free rate zero Sharpe ratio. It follows that over a given time period, investments with higher Sharpe ratios performed better, because they generated higher higher excess returns per unit of risk.

The Sharpe ratio is calculated as: (Expected Return - Risk Free Rate) / Standard Deviation

Quantitative Problem:

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