Answered: Assuming that the rates of return…

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter11: Risk-adjusted Expected Rates Of Return And The Dividends Valuation Approach

Section: Chapter Questions

Problem 4QE

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Assuming that the rates of return associated with a given asset investment are normally distributed; that the expected return, r, is 18.7%; and that the coefficient of variation, CV, is 1.88, answer the following questions:

a. Find the standard deviation of returns,

sigma Subscript rσr.

b. Calculate the range of expected return outcomes associated with the following probabilities of occurrence: (1) 68%, (2) 95%, (3) 99%.

Features Features Normal distribution is characterized by two parameters, mean (µ) and standard deviation (σ). When graphed, the mean represents the center of the bell curve and the graph is perfectly symmetric about the center. The mean, median, and mode are all equal for a normal distribution. The standard deviation measures the data's spread from the center. The higher the standard deviation, the more the data is spread out and the flatter the bell curve looks. Variance is another commonly used measure of the spread of the distribution and is equal to the square of the standard deviation.

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