Question

1)
a)
You are considering acquiring shares of common stock in the Madison Beer Corp.
Your rate of return expectations are as follows:
Possible rate of return       Possibility
-0.1               0.3
0.00               0.1
0.1               0.3
0.25               0.3
Compute the expected return on your investment

b)
You are considering acquiring shares of common stock in the Lauren computer Corp.
Your rate of return expectations are as follows:
Possible rate of return       Possibility
-0.6               0.05
-0.3               0.2
-0.1               0.1
0.20               0.3
0.4               0.2
0.8               0.15
Compute the expected return on your investment

C) Without any formal computations, do you consider which one A or B presents greater risk? Why?

Answer 1

a)

X	P(X)	X*P(X)
-0.1	0.30	-0.03
0	0.10	0
0.1	0.30	0.03
0.25	0.30	0.075

mean = E[X] = Σx*P(X) =            0.075
so, expected return = 7.5%

b)

X	P(X)	X*P(X)
-0.6	0.05	-0.03
-0.3	0.20	-0.06
-0.1	0.10	-0.01
0.2	0.30	0.06
0.4	0.20	0.08
0.8	0.1500	0.12

	P(X)	X*P(X)
total sum =	1	0.16

mean = E[X] = Σx*P(X) =            0.160

so,expected return = 16%

c)

As the higher the risk, higher the return, so, from computation,  Lauren computer Corp appear to have higher risk

without any computation :

we can see, Madison Beer Corp has one negative return and three positive return with higher probabilities ,and range of return is lower

but  Lauren computer Corp has 3 negative and 3 positive return , with high variation which result in higher risk and higher expected value.

so, answer is Lauren computer Corp appear to have higher risk