Question

You are given the following probability distribution for a stock:

Probability Outcome

.5 -6%

.5 18%

A) Compute the expected return.

B) Compute the standard deviation.

C) Compute the coefficient of variation.

Answer 1

Here outcome means returns from the stock. Let the returns from the stock be X

Calculations are shown below

x PXX x-X -X (X-X) Probability (P) 0.50 0.50 -6 18 -12 12 PIX-X)? 144 72.00 14472.00 9 144.00 Expected Return X = Total of PX column X = 6 or 6% Variance = Total of P(X-X)? Standard Deviation = Wariance =v144 = 12 or 12% Coefficient of variation = (Standard Deviation / Expected Return) * 100 Standard Deviation = 12 Expected Return = 6 Coefficient of variation = (12 / 6) * 100 = 200%