Question

In: Finance

Expected Return: Discrete Distribution A stock's return has the following distribution: Demand for the Company's Products...

Expected Return: Discrete Distribution

A stock's return has the following distribution:

Demand for the
Company's Products
Probability of This
Demand Occurring
Rate of Return if This  
Demand Occurs (%)
Weak 0.1 -25%
Below average 0.2 -8
Average 0.4 6
Above average 0.2 30
Strong 0.1 60
1.0

Calculate the stock's expected return. Round your answer to two decimal places.
10.3 %

Calculate the standard deviation. Round your answer to two decimal places.

???? %

I was able to answer the first question but not the second. Could you help please?

Solutions

Expert Solution

Compute the expected return using MS-Excel as follows:

The result of the above table is as follows:

Hence, the expected return is 10.30%.

Compute the Variance using the equation as shown below:

Standard deviation =[ (-25% - 10.30%)2 + (-8% - 10.30%)2 + (6% - 10.30%)2  + (30% - 10.30%)2 + (60% - 10.30%)2 ] / Number of observation - 1

= [ (-25% - 10.30%)2 + (-8% - 10.30%)2 + (6% - 10.30%)2  + (30% - 10.30%)2 + (60% - 10.30%)2 ] / 5 - 1

= 51.54

Hence, the variance is 51.54.

Standard deviation is the square root of Variance.

Compute the standard deviation using the equation as shown below:

Standard deviation = Variance0.5

= 51.540.5

= 7.18

Hence, the standard deviation is 7.18.


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