Question
The returns of Stock A follow the discrete probability distribution below: Outcome Probability Return 1 0.08 0.15 2 0.12 0.09 3 0.05 -0.06 4 0.11
The returns of Stock A follow the discrete probability distribution below:
Outcome | Probability | Return |
1 | 0.08 | 0.15 |
2 | 0.12 | 0.09 |
3 | 0.05 | -0.06 |
4 | 0.11 | 0.10 |
5 | 0.15 | 0.12 |
6 | 0.07 | 0.14 |
7 | 0.13 | 0.13 |
8 | x | 0.00 |
9 | 0.11 | -0.03 |
10 | 0.09 | 0.07 |
a) What is the probability of outcome 8 occurring? Report your answer to four decimal places.
b) Find the expected return of Stock A. Report your answer to four decimal places.
c) Find the variance of Stock As return. Report your answer to four decimal places.
d) Describe the difficulties associated with using ex ante volatility measures in practice. Use your own words.
e) Describe the circumstances under which it might be appropriate or advantageous to employ an ex-ante volatility measure. Use your own words.
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