Question

The following probability distributions of returns for two stocks have been estimated:
Probability Stock A Stock B
0.3 12% 8%
0.4 8 4
0.3 6 3
What is the coefficient of variation for the stock that is less risky (assuming you use the coefficient of variation to rank riskiness).

		0.66
		3.62
		5.16
		0.28
		0.19

Answer 1

Stock A
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(A)^2* probability
Scen. 1	0.3	12	3.6	3.4	0.0003468
Scen. 2	0.4	8	3.2	-0.6	0.0000144
Scen. 3	0.3	6	1.8	-2.6	0.0002028
	Expected return %=	sum of weighted return =	8.6	Sum=Variance Stock A=	0.00056
			Standard deviation of Stock A%	=(Variance)^(1/2)	2.37
			Coefficient of variation=	Std. dev./return=	0.2756
Stock B
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(B)^2* probability
Scen. 1	0.3	8	2.4	3.1	0.0002883
Scen. 2	0.4	4	1.6	-0.9	0.0000324
Scen. 3	0.3	3	0.9	-1.9	0.0001083
	Expected return %=	sum of weighted return =	4.9	Sum=Variance Stock B=	0.00043
			Standard deviation of Stock B%	=(Variance)^(1/2)	2.07
			Coefficient of variation=	Std. dev./return=	0.4224

0.28 is the answer