Question

stocks acris ve thG Foloweng onbutions Probability of This Demand Occurring Rate of Return Demand for the Company's Products This Demand Occurs (28%) (13) weak 0.1 Below avarage 0.1 Average 0.4 11 Abave average 0.3 38 Strong 0.1 63 10 aume the risie-free rate is 4 acas Calculate the stock's expected return, standard deviation, coeficient of variation, and Sharpe ratio De not round intermediate calculations. Reund your answers to twe decimal tock's epected retum tandard deviations Coeficent of vanation herpe rata

Answer 1

Solution :

The stock's expected return = 18 %

The stock's Standard Deviation = 25.4912 %

= 25.49 % ( when rounded off to two decimal places )

The coefficient of variation = 1.42

Please find the attached screenshot of the excel sheet containing the detailed calculation for the Expected Return, Standard Deviation and Coefficient of variation.

Calculation of Sharpe’s Ratio:

The formula for calculating the Sharpe ratio is

= ( R_S – R_F ) / σ_S

Where Rs = Expected Return ;   R_F = Risk free rate    ;   σs: Standard Deviation

As per the Information given in the question we have

Rs = 18 %    ;     R_F = 4 %    ;      σs= 25.4912 %

Applying the above values in the above formula we have

= ( 18 % - 4 % ) / 25.4912 %

= 14 % / 25.4912 %

= 0.5492

= 0.55 ( when rounded off to two decimal places )

Thus the Sharpe Ratio = 0.55   

29.10.2019 - Microsoft Excel ? - ES FILE HOME А PAGE LAYOUT FORMULAS DATA REVIEW VIEW sig INSERT в Demand for the company's products Probability of this demand occuring (p) (2) Expected Return and Variance of the Stock Rate of Expected Return Deviation % =D (D)? Variance = p * (D)? Return if this demand occurs (3) (4) = (2) * (3) (5) = (3) -2 (4) 6) = (5) 2 (7) = (2) + (6) -2.80 -46.00 2116.00 211.6000 -1.30 -31.00 961.00 96.1000 4.40 -7.00 49.00 19.6000 11.40 20.00 400.00 120.0000 6.30 45.00 2025.00 202.5000 I = 18% I(p* (D3)2) = (0) = 649.8000 (1) Weak Below average Average Above average Thus Expected Return of the stock = 18 % Variance of the stock = ( Os )' = 649.8000 0.1 0.4 0.3 Standard Deviation of the stock = Square root of variance of the stock Standard Deviation of the stock = SQRT(19) = 05 = 25.4912% Strong 0.1 1.0 The Co-efficient of variation of the stock is calculated as follows: Coefficient variation = (Standard Deviation / Mean) = (25.4912/18) = 1.4162 The Co-efficient of variation of the stock is = 1.4162 = 1.42 (when rounded off to two decimal places)