Question

Stocks A and B have the following probability distributions of expected future returns:

Probability	A	B
0.1	(13%)	(40%)
0.2	6	0
0.3	13	23
0.3	22	27
0.1	36	49

1. Calculate the expected rate of return, r_B, for Stock B (r_A = 14.00%.) Do not round intermediate calculations. Round your answer to two decimal places.
   %

2. Calculate the standard deviation of expected returns, σ_A, for Stock A (σ_B = 22.91%.) Do not round intermediate calculations. Round your answer to two decimal places.
   %

3. Now calculate the coefficient of variation for Stock B. Round your answer to two decimal places.
   

Answer 1

	STOCK A
	p	A	C=p*A	D=A-14	E=(D^2)	F=E*p
	Probability	Expected Return	(Probability) *(Return)	Deviation from expected	Deviation Squared	(Deviation Squared)*(Probability)
	0.1	(13.00)	-1.3	(27.00)	729.00	72.90
	0.2	6	1.2	(8.00)	64.00	12.80
	0.3	13	3.9	(1.00)	1.00	0.30
	0.3	22	6.6	8.00	64.00	19.20
	0.1	36	3.6	22.00	484.00	48.40
		Sum	14		Sum	153.60
	Expected Return of Stock A	14	Percent
	Variance of Return of stock A	153.60
	Standard Deviation=Square Root of Variance
	Standard Deviation of return of A	12.39355	(153.60^(1/2)
	Standard Deviation of return of A	12.39%
	STOCK B
	p	A	C=p*A	D=A-14	E=(D^2)	F=E*p
	Probability	Expected Return	(Probability) *(Return)	Deviation from expected	Deviation Squared	(Deviation Squared)*(Probability)
	0.1	(40.00)	-1.3	(54.00)	2,916.00	291.60
	0.2	0	0	(14.00)	196.00	39.20
	0.3	23	6.9	9.00	81.00	24.30
	0.3	27	8.1	13.00	169.00	50.70
	0.1	49	4.9	35.00	1,225.00	122.50
		Sum	18.6		Sum	528.30
	Expected Return of Stock B	18.60	Percent
	Variance of Return of stock B	528.30
	Standard Deviation=Square Root of Variance
	Standard Deviation of return of B	22.98478	(528.3^(1/2)
	Standard Deviation of return of B	22.98%
	Coefficient of variation=Standard Deviationof return/Expected return
	Coefficient of variation of Stock B	1.235741	(22.98/18.60)
a	Expected Return of B(rB)	18.60%
b	Standard Deviation of A	12.39%
c	Coefficient of variation of B	1.235741