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Standard Deviation of Return

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The expected returns earned from investment in the stock of two companies, Company A and Company B, are shown in the following table. Use the table to complete parts (a) through (e) below.

Demand for Product
Probability of Demand
Expected Return: Stock A
Expected Return: Stock B
Strong
0.3
40%
20%
Normal
0.45
20%
5%
Weak
0.25
0%
(5%)

(a) Compute the expected rates of return for each stock.
(b) Compute the standard deviations for each stock.
(c) Compute the coefficient of variation for each stock. Based on the coefficient of variation, which stock has the higher risk for investment?
(d) Assume a two-stock portfolio with $25,000 in Company A and $75,000 in Company B. Compute the expected return on the portfolio.
(e) Compute the standard deviation of the two-stock portfolio.

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Solution Summary

Expected rates of return and the standard deviations for stocks have been computed.

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