A stock has the following probability distribution: _____________________________________________________________________ Demand for the Probability of this Rate of return if this Company’s products ...

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Finance

A stock has the following probability distribution:
     ___________________________________
      Demand forthe                Probability ofthis                  Rate of return if this
      Company’sproducts         demandoccurring                 demandoccurs
_
     Weak                                0.10                                       -50%
      BelowAverage                0.20                                        -5%
     Average                            0.40                                        16%
      AboveAverage                0.20                                        25%
     Strong                              0.10                                        60%
     ____________________________________
      Calculate the stock’s expectedreturn, variance of returns, and standard deviation of returns.

Answer & Explanation Solved by verified expert

4.5 Ratings (1131 Votes)

a.	Expected return	11.40%

	Working:

	Demand for the Company’s products	Probability of this demand occurring	Rate of return if this demand occurs
		a	b	a*b
	Weak	0.10	-50%	-5.00%
	Below Average	0.20	-5%	-1.00%
	Average	0.40	16%	6.40%
	Above Average	0.20	25%	5.00%
	Strong	0.10	60%	6.00%

	Total			11.40%

b.	Variance of the return	0.0712

	Working:

	Demand for the Company’s products	Probability of this demand occurring	Rate of return if this demand occurs	Expected return
		a	b	c	d=((b-c)^2)*a
	Weak	0.10	-50%	11.40%	0.0377
	Below Average	0.20	-5%	11.40%	0.0054
	Average	0.40	16%	11.40%	0.0008
	Above Average	0.20	25%	11.40%	0.0037
	Strong	0.10	60%	11.40%	0.0236

	Total				0.0712


c.	Standard deviation of return	26.69%

	Working:

	Standard deviation of return	=	Variance ^ (1/2)
		=	0.0712	^ (1/2)
		=	26.69%

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Transcribed Image Text

A stock has the following probability distribution: _____________________________________________________________________ Demand forthe Probability ofthis Rate of return if this Company’sproducts demandoccurring demandoccurs _____________________________________________________________________ Weak 0.10 -50% BelowAverage 0.20 -5% Average 0.40 16% AboveAverage 0.20 25% Strong 0.10 60% ______________________________________________________________________ Calculate the stock’s expectedreturn, variance of returns, and standard deviation of returns.