EBK CFIN
6th Edition
ISBN: 9781337671743
Author: BESLEY
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 8, Problem 5PROB
Summary Introduction
Expected
Standard deviation is the financial measure of risk and stability on the
Coefficient of variance is a measure used to calculate the total risk per unit of return of an investment.
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Supposing the return from an investment has the following probability distribution
Return Probability
R (%)
8 0.2
10 0.2
12 0.5
14 0.1
Required:
What is the expected return of the investment?
What is the risk as measured by the standard deviation of expected returns?
On the basis of the utility formula below, which investment would you select if you were risk averse with A = 4?
Investment
Expected return E(r)
Standard deviation
σ
1
0.12
0.30
2
0.15
0.50
3
0.21
0.16
4
0.24
0.21
The expected rate of return of an investment ________.
a. equals one of the possible rates of return for that investment
b. equals the required rate of return for the investment
c. is the mean value of the probability distribution of possible returns
d. is the median value of the probability distribution of possible returns
e. is the mode value of the probability distribution of possible returns
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- An investment has probabilities 0.15, 0.34, 0.44, 0.67, 0.2 and 0.15 of giving returns equal to 50%, 39%, -4%, 20%, -25%, and 42%. What are the expected returns and the standard deviations of returns?arrow_forwardCompute the (a) expected return, (b) standard deviation, and (c) coefficient of variation for investments with the following probability distributions: Probability r/A r/B 0.3 30.0% 5.0% 0.2 10.0 15.0 0.5 -2.0 25.0arrow_forwardThe standard deviation of return on investment a is 0.10, while the standard deviation of return on investment b is 0.04. If the correlation coefficient between the returns on A and B is_____________. A. -0.0447 B. -0.0020 C. 0.0020 D. 0.0447arrow_forward
- Calculate the expected return for an investment with the following probability distribution. Return (%) Probability (%) -10 20 5 20 10 20 17 30 26 10arrow_forwardWhat is the expected return of a portfolio of two risky assets if the expected return E(Ri), standard deviation (SDi), covariance (COVij), and asset weight (Wi) are as shown below? Asset (A) E(R₁) = 10% SDA = 8% WA = 0.25 COVAB = 0.006 Asset (B) E(R₂) = 15% SDB = 9.5% WB = 0.75arrow_forwardAssuming the following returns and corresponding probabilities for Asset D: Rate of Return Probability 10% 30% 15% 40% 20% 30% Compute for: a. Expected rate of return b. The standard deviation c. The coefficient of variationarrow_forward
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