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The following probability distributions of returns for two stocks have been estimated: Probability Stock A Stock B 0.3...

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Finance

The following probability distributions of returns for twostocks have been estimated:
Probability Stock A Stock B
0.3 12% 8%
0.4 8 4
0.3 6 3
What is the coefficient of variation for the stock that is lessrisky (assuming you use the coefficient of variation to rankriskiness).

0.66

3.62

5.16

0.28

0.19

Answer & Explanation Solved by verified expert
3.9 Ratings (437 Votes)

Stock A
Scenario Probability Return% =rate of return% * probability Actual return -expected return(A)% (A)^2* probability
Scen. 1 0.3 12 3.6 3.4 0.0003468
Scen. 2 0.4 8 3.2 -0.6 0.0000144
Scen. 3 0.3 6 1.8 -2.6 0.0002028
Expected return %= sum of weighted return = 8.6 Sum=Variance Stock A= 0.00056
Standard deviation of Stock A% =(Variance)^(1/2) 2.37
Coefficient of variation= Std. dev./return= 0.2756
Stock B
Scenario Probability Return% =rate of return% * probability Actual return -expected return(A)% (B)^2* probability
Scen. 1 0.3 8 2.4 3.1 0.0002883
Scen. 2 0.4 4 1.6 -0.9 0.0000324
Scen. 3 0.3 3 0.9 -1.9 0.0001083
Expected return %= sum of weighted return = 4.9 Sum=Variance Stock B= 0.00043
Standard deviation of Stock B% =(Variance)^(1/2) 2.07
Coefficient of variation= Std. dev./return= 0.4224

0.28 is the answer
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Transcribed Image Text

The following probability distributions of returns for twostocks have been estimated:Probability Stock A Stock B0.3 12% 8%0.4 8 40.3 6 3What is the coefficient of variation for the stock that is lessrisky (assuming you use the coefficient of variation to rankriskiness).0.663.625.160.280.19

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