Question

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Quantitative Problem: You are given the following probability distribution for CHC Enterprises: State of Economy Probability...

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

State of Economy Probability Rate of return
Strong 0.15 19%
Normal 0.5 8%
Weak 0.35 -5%

What is the stock's expected return? Round your answer to 2 decimal places. Do not round intermediate calculations.
%

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

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

Solutions

Expert Solution

Stock expected return = 0.15* .19 + 0.5 * 0.08 + 0.35* -0.05

                                          = 0.0285 + 0.04 – 0.0175

                                            = 0.051 or 5.1%

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State of Economy

Probability

Rate of return

Probability*return

(expected return-return)^2

Deviation*probability

Strong

0.15

19%

0.028500

0.019321

0.00289815

Normal

0.5

8%

0.040000

0.0064

0.0032

Weak

0.35

-5%

-0.017500

0.0025

0.000875

0.051000

Total

0.0070

Standard deviation = √0.0070

                                    = 0.0837 or 8.37%

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Coefficient of variation = standard deviation/expected return

                                           = 0.0837/ 0.051

                                             = 1.64

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Feel free to comment if you need further assistance J

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