Question

A stock's returns have the following distribution: Probability of this Rate of Return If Demand Occurring This Demand Occurs 0.2 Demand for the Company's Products Weak Below average Average Above average Strong 0.2 (8) 0.3 0.1 0.2 1.0 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

Stocks expected return = 0.2 $\times$ -0.46 + 0.2 $\times$ -0.08 + 0.3 $\times$ 0.11 + 0.1 $\times$ 0.22 + 0.2 $\times$ 0.49

Stocks expected return = 4.50%

The stocks variance = 0.2 $\times$ [  -0.46 - 0.045 ] ² + 0.2 $\times$ [ -0.08 - 0.045 ] ² + 0.3 $\times$ [ 0.11 - 0.045 ] ² + 0.1 $\times$ [ 0.22 - 0.045 ] ² + 0.2 $\times$ [ 0.49 - 0.045 ] ²

Stocks variance = 0.098065

Standard deviation =

V variance = V0.098065

Standard deviation = 31.32%

Standard deviation Coefficient of variation = 7 Stocks expected return 4.50% 31.32%

Coefficient of variation = 0.14

Sharpe ratio = Stock expected return - risk free rate Stocks standard deviation 4.50% -3% 31.32%

Sharpe ratio = 0.05

Stocks expected return	4.50%
Standard deviation	31.32%
Coefficient of variation	0.14
Sharpe ratio	0.05