Question

A stock's returns have the following distribution: Demand for the Company's ProductsProbability of This Demand OccurringRate of Return If This Demand Occurs Weak0.1(48%) Below average0.2(15) Average0.317 Above average0.331 Strong0.163 1.0 Assume the risk-free rate is 4%. 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

Answer:

Stock's expected return = 12.90%

Standard Deviation = 29.68%

Coefficient of variation = 2.30

Sharpe ratio = 0.30

Explanation:

Note: See the attached excel file for the calculations of the Stock's expected return and Variance.

Given:

Risk-free rate = 4%.

From the attached excel file, we have:

Stock's expected return = Total of Stock's Expected Return = 0.1290, or 12.90%

Variance = Total of F = 0.0880890, or 8.8089%

Standard Deviation = Variance^0.5 = 0.0880890^0.5 = 0.2968, or 29.68%

Coefficient of variation = Standard Deviation / Stock's expected return = 29.68% / 12.90% = 2.30

Sharpe ratio = (Stock's expected return - Risk-free rate) / Standard Deviation = (12.90% - 4%) / 29.68% = 0.30

Download xlsx