Question

Roenfeld Corp believes the following probability distribution exists for its stock. What is the coefficient of variation on the company's stock? Do not round your intermediate calculations. State of Probability Stock's the of State Expected Economy Occurring Return Boom 0.14 25% Normal 0.50 15% Recession 0.36 5%

Answer 1

Computation of mean and standard deviation of stock State of the economy Probability Return Probability * Return Mean Deviation Deviation 2 Probability * Deviation 2 Boom 0.14 25 3.5 12.8 12.2 148.84 20.8376 Normal 0.5 15 7.5 12.8 2.2 4.84 2.42 Recession 0.36 5 12.8 -7.8 60.84 21.9024 12.8 45.16 Mean = Sum of (Probability * Return) = 12.8% Deviation = Return - Mean 1.8 Standard deviation = Square root of [ Sum of (Probability * Deviation 2)] = Square root of [ 45.16%] = 6.720119047 % Coefficient of variation = Standard deviation/Mean = 6.720119047%/ 12.8% = 0.525009301 = 0.525 (Rounded) Ans : Coefficient of variation = 0.525 (Or) = 5.25%