Ripken Iron Works believes the following probability distribution exists for its stock. What is the coefficient of variation on the company's stock?
A) 0.4360
B) 0.4714
C) 0.5068
D) 0.5448

Question

Ripken Iron Works believes the following probability distribution exists for its stock. What is the coefficient of variation on the company's stock? 
A) 0.4360 
B) 0.4714 
C) 0.5068 
D) 0.5448

Quizplus · Accepted Answer

The coefficient of variation (CV) is equal to the standard deviation divided by the mean. The mean can be found by multiplying each outcome by its corresponding probability and summing up the products. For Ripken Iron Works, the mean is (0.1 x 15) + (0.2 x 10) + (0.4 x 5) + (0.2 x 0) + (0.1 x (-5)) = 2.5. 
To find the standard deviation, first find the variance by taking the sum of the squared differences between each outcome and the mean, multiplied by its probability. That is, [(15-2.5)^2 x 0.1] + [(10-2.5)^2 x 0.2] + [(5-2.5)^2 x 0.4] + [(0-2.5)^2 x 0.2] + [(-5-2.5)^2 x 0.1] = 26.25. Then take the square root of the variance to get the standard deviation, which is approximately 1.618. 
Finally, divide the standard deviation by the mean to get the coefficient of variation, which is approximately 0.4714. Thus, the answer is B.

Ripken Iron Works Believes the Following Probability Distribution Exists for Its