Question

Kate recently invested in real estate with the intention of selling the property one year from today. She has modeled the returns on that investment based on three economic scenarios. She believes that if the economy stays healthy, then her investment will generate a 30 percent return. However, if the economy softens, as predicted, the return will be 10 percent, while the return will be -25 percent if the economy slips into a recession.

1) If the probabilities of the healthy, soft, and recessionary states are 0.6 , 0.3 , and 0.1 , respectively, then calculate the coefficient of variation for the investment?

2) Barbara is considering investing in a stock and is aware that the return on that investment is particularly sensitive to how the economy is performing. Her analysis suggests that four states of the economy can affect the return on the investment. Using the table of returns and probabilities below calculate the coefficient of variation for the investment?

Probability

Return

Boom	0.3	25.00%
Good	0.2	15.00%
Level	0.4	10.00%
Slump	0.1	-5.00%

3) Ben would like to invest in gold and is aware that the returns on such an investment can be quite volatile. Use the following table of states, probabilities, and returns and calculate the coefficient of variation for the investment?

Probability

Return

Boom	0.1	34 %
Good	0.2	23 %
Ok	0.3	9 %
Level	0.2	4 %
Slump	0.2	-16 %

Answer 1