Question

47. Ripken Iron Works believes the following probability distribution exists for its stock. What is the coefficient of variation on the company's stock?

           

            State                            Probability                               Stock's

            Of the Economy           of State Occurring                   Expected Return

            Boom                                       .25                                           25%

            Normal                                    .50                                           15%

            Recession                                .25                                           5%

               a. 0.4360              b. 0.4714              c. 0.5068              d. 0.5448             

48. The excess return required from a risky asset over that required from a risk-free asset:

               A. risk premium

               B. geometric premium

               C. co-efficient of variation

               D. alpha variance

Answer 1

Ans47

State	Probability(p)	Return(x)	p*x	p*((x-∑px)^2)
Boom	0.25	25	6.25	25.00
Normal	0.5	15	7.5	-
Recession	0.25	5	1.25	25.00
		∑px	15	50.00
	Mean	15
	standard deviation(%)=	∑p*((x-∑px)^2)^(1/2)
			(50)^(1/2)
			7.0711
	Coefficient of variation= (SD/Mean)*100=	7.0711/15=	0.4714

So the correct answer is option b i.e. 0.4714.

Ans 48 The correct answer is option A i.e. risk premium

As per CAPm, Risk premium= Market return (i.e. return from a risky asset) - risk free rate (i.e. return from risk free asset)