Question

In: Finance

A stock's returns have the following distribution: Demand for the Company's Products Probability of This Demand...

A stock's returns have the following distribution:

Demand for the
Company's Products
Probability of This
Demand Occurring
Rate of Return If
This Demand Occurs
Weak 0.1 (34%)
Below average 0.1 (14)   
Average 0.3 11   
Above average 0.3 38   
Strong 0.2 45   
1.0

Assume the risk-free rate is 4%. Calculate the stock's expected return, standard deviation, coefficient of variation, and Sharpe ratio. Do not round intermediate calculations. Round your answers to two decimal places.

Stock's expected return:   %

Standard deviation:   %

Coefficient of variation:

Sharpe ratio:

Solutions

Expert Solution

Ans:-

The expected return is 28.50% and Standard deviation will be 197.45 ^(1/2) = 14.05%

Standard deviation (SD) is calculated by taking the square root of variance.

Coefficient of variation (COV) is calculated by SD / Expected return or Mean = 14.05 / 28.50 = 0.49

Sharpe ratio = ( Expected return - Risk-free rate ) / SD =(28.50 - 4 ) /14.05 = 1.74

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