Question

The market and Stock A have the following probability distributions:

Probability	Return on Market	Return on Stock A
0.15	15%	18%
0.3	12%	15%
0.55	10%	11%

a. Calculate the expected rates of return for the market and Stock A.

b. Calculate the standard deviations for the market and Stock A.

c. Calculate the coefficient of variation for the market and Stock A.

Answer 1

Solution:

a. The expected rates of return for the market and Stock A are as follows :

Market = 11.35 %

Stock A = 13.25 %

b. The standard deviations for the market and Stock A are as follows:

Market = 1.7685 % = 1.77 % ( when rounded off to two decimal places )

Stock A = 2.6622 % = 2.66 % ( when rounded off to two decimal places )

c. The coefficient of variation for the market and Stock A are as follows :

Market = 0.1558 = 0.16 ( when rounded off to two decimal places )

Stock A = 0.2009 = 0.20 ( when rounded off to two decimal places )

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.