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 1 year ago

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