Question

1. Use the following information to find volatility (standard deviation) and expected return of ABC Company. Also find coefficient of variation. How do you explain? Which stock is riskier considering both risk and return? 4 Points

States          Probability                         Return             

Economy         (P)                  Orl. Utility     Orl. Tech

Recession       0.20                   4%            -10%

Bad                 0.10                   6%             4%

Normal            0.40                  10%            14%

Boom               0.30                  14%            30%

Answer 1

FOR ORl. UTILITY

Probability (P)	Return (in %) (R)	Return * prob (RP)	P( R - expexted return)2
0.20	4	0.8	6.272
0.10	6	0.6	1.296
0.40	10	4	0.064
0.30	14	4.2	5.808

Expected return (mean) for Orl. Utility = 9.6%

Standard deviation = = 3.666 %(approx)

Coefficient of variation =

Coefficient of variation for ORl. UTILITY = 0.382 (approx)

FOR ORl. TECH

Probability (P)	Return (in %) (R)	Return * prob (RP)	P( R - expexted return)2
0.20	-10	-2	105.8
0.10	4	0.4	8.1
0.40	14	5.6	0.4
0.30	30	9	89.7

Expected return (mean) for Orl. Tech = 13 %

Standard deviation = = 14.18 %(approx)

Coefficient of variation =

Coefficient of variation for ORl. TECH = 1.09 (approx)

NOTE : Coefficient of variation for ORl. TECH is greater than Coefficient of variation for ORl. UTILITY,therefore Orl. Tech is more risky security.