Question
In: Finance
Consider the following subjective probability distribution for a potential investment: State of the economy probability Estimated...
- Consider the following subjective probability distribution for a potential investment:
|
State of the economy |
probability |
Estimated rate of return |
|
Strong growth |
.1 |
25% |
|
Moderate growth |
.4 |
15 |
|
Weak growth |
.4 |
10 |
|
Recession |
.1 |
-12 |
- Calculate the expected rate of return
- Calculate the variance
- Calculate the standard deviation
- Calculate the coefficient of variation
- Interpret your answers in a-d
Solutions
Expert Solution
Expected Return = 0.10(0.25) + 0.40(0.15) + 0.40(0.10) + 0.10(-0.12)
Expected Return = 11.30%
Variance = [(0.1)(0.25 - 0.113)2 + 0.4(0.15 - 0.113)2 + (0.4)(0.10 - 0.113)2 + 0.1(-0.12 - 0.113)2]
Variance = 0.0079
Standard Deviation = (0.0079)1/2
Standard Deviation = 0.089
CV = 0.089/0.113
CV = 0.79
jeff jeffy answered 2 years agoRelated Solutions
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