Question

8.1

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A stock's returns have the following distribution: Demand for the Company's Products Weak Below average Average Above average Strong Probability of this Rate of Return If Demand Occurring This Demand Occurs 0.1 (44%) (10) 0.3 0.3 64 Assume the risk-free rate is 3%. Calculate the stock's expected return, standard deviation, coefficient of variation, and Sharpe ratio. Do not round intermediate calculations. Round your answers to two decimal places. Stock's expected return: Standard deviation: % Coefficient of variation: Sharpe ratio:

Answer 1

Expected Return = (0.1(-0.44) + 0.1(-0.10) + 0.3(0.15) + 0.3(0.40) + 0.2(0.64)

Expected Return = 23.90%

Standard Deviation = [(0.1(-0.44 - 0.239)² + 0.1(-0.10 - 0.239)² + 0.3(0.15 - 0.239)² + 0.3(0.40 - 0.239)² + 0.2(0.64 - 0.239)²]^1/2

Standard Deviation = 0.3161

CV = 0.3161/0.2390 = 1.32

Sharpe Ratio = (0.239 - 0.03)/0.3161

Sharpe Ratio = 0.66