8. Your investment has a 20% chance of earning a 25% rate of return, a 50%...

8. Your investment has a 20% chance of earning a 25% rate of return, a 50% chance of earning a 12% rate of return and a 30% chance of losing 10%. What is your expected return on this investment? What is the standard deviation? What is the coefficient of variation?

Solutions

Expert Solution

Expected return=Respective return*Respective probability

=(0.2*25)+(0.5*12)+(0.3*-10)

=8%

probability	Return	probability*(Return-Expected Return)^2
0.2	25	0.2*(25-8)^2=57.8
0.5	12	0.5*(12-8)^2=8
0.3	-10	0.3*(-10-8)^2=97.2
		Total=163%

Standard deviation=[Total probability*(Return-Expected Return)^2/Total probability]^(1/2)

=(163)^(1/2)

=12.77%(Approx)

Coefficient of variation=Standard deviation/Expected return

=12.77/8

=1.596(Approx)

jeff jeffy answered 2 years ago

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