Q No
Subject:FinancePrice:2.86 Bought9
Q No. 3:a Suppose that your estimates of the possible one-year returns from investing in the common stock of XYZ corporation, Probability of Possible Return Occurrence 0.1 -10% 0.2 20% 0.4 05% 0.1 50% 0.2 35% Compute the Coefficient of Variation? (10 Marks) b Calculate required rate of return for XYZ Corporation if it has a beta coefficient of 1.2 the risk free rate is 8% and the expected market return 15%.
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Solution (a)
| Probability (p) | Possible return (X) (%) | p*X | X-averageX | p*(X-averageX)2 |
| 0.1 | -10 | -1 | -27 | 72.9 |
| 0.2 | 20 | 4 | 3 | 1.8 |
| 0.4 | 5 | 2 | -12 | 57.6 |
| 0.1 | 50 | 5 | 33 | 108.9 |
| 0.2 | 35 | 7 | 18 | 64.8 |
| 17 | 306 |
Mean = 17
Standard deviation = √306 = 17.49%
Therefore, coefficient of variation = standard deviation/mean
= 17.49/17 = 1.03
Solution (b)
Required rate of return = risk free rate + market risk premium*beta
= 8+(15-8)*1.2 = 16.4%
