Ripken Iron Works believes the following probability distribution exists for its stock.What is the coefficient of variation on the company's stock? $\begin{array}{lccc}
\text { State of the } &\text { Frobability of } &\text { Stock's Expected } \
\text { Economy } & \text { State Occurring } & \text { Return } \
\hline \text { Boom } & 0.25 & 25 \% \
\text { Normal } & 0.50 & 15 \% \
\text { Recession } & 0.25 & 5 \%
\end{array}$
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? $\begin{array}{lccc}
\text {   State of the  } &\text { Frobability of } &\text { Stock's Expected } \
\text { Economy } & \text { State Occurring } &  \text { Return } \
\hline  \text { Boom } & 0.25 & 25 \% \
\text { Normal } & 0.50 & 15 \% \
\text { Recession } & 0.25 & 5 \%
\end{array}$
A)0.4360
B)0.4714
C)0.5068
D)0.5448

Quizplus · Accepted Answer

Coefficient of variation (CV) can be calculated as the ratio of standard deviation to the mean.

First, calculate the expected return for Ripken Iron Works stock:

Expected return = (0.25 x 25%) + (0.50 x 15%) + (0.25 x 5%) = 15%

Next, calculate the standard deviation:

Standard deviation = SQRT[(0.25 x (25% - 15%)^2) + (0.50 x (15% - 15%)^2) + (0.25 x (5% - 15%)^2)]
= SQRT[0.01 + 0 + 0.04]
= 0.2236

Now, calculate the coefficient of variation:

CV = Standard deviation / Mean = 0.2236 / 0.15 = 1.49

Therefore, the coefficient of variation on the company's stock is 1.49 or 0.4714 in percentage, which is the best choice B.

Ripken Iron Works Believes the Following Probability Distribution Exists for Its