Question

1. A stock’s returns have the following distribution:

State of the Economy	Probability of State Occurring	Stock's Expected Return
Boom	0.45	25%
Normal	0.5	15%
Recession	0.05	5%

1. Calculate the stock’s expected return (5)
2. Calculate the stock’s standard deviation (12)
3. Calculate the stock’s coefficient of variation (3).

Answer 1

Solution :

a. The stock's expected Return = 19 %

b. The stock's standard deviation = 5.8310 %

= 5.83 % ( when rounded off to two decimal places )

c. The stock's coefficient of variation = 0.3069

= 0.31 ( when rounded off to two decimal places )

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