Question

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.

Answer 1

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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