Question

An analyst has developed the following probability distribution for the rate of return for a common stock.

Scenario Probability Rate of Return
10 0.34 -19%
20 0.48 8%
30 0.18 26%
a. Calculate the expected rate of return. Round your answer to 2 decimal places.
b. Calculate the variance and the standard deviation of this probability distribution. Use the percentage values for your calculations (for example 10% not 0.10). Round intermediate calculations to 4 decimal places.

Answer 1

a) 2.06

b) variance = 270.90 , std = 275.14

Explanation:

a) Determine Expected rate of return

attached below is the calculated table for the solution provided

∴ Expected rate of return = ∑ Xp(x) = -6.46 + 3.84 + 4.68 = 2.06

b) Determine the variance and standard deviation

Variance ( Vx ) = E(x)^2 - [ Expected rate of return ]^2

= 275.14 - ( 2.06 )^2 ≈ 270.90

standard deviation = √ variance = √270.90 = 16.459

note : E(x)^2 = ∑ x^2 p(x) = 275.14