Question

2. 2: Risk and Rates of Return: Stand-Alone Risk

Stand-alone risk is the risk an investor would face if he or she held only _______ . No investment should be undertaken unless its expected rate of return is high enough to compensate for its perceived _______ . The expected rate of return is the return expected to be realized from an investment; it is calculated as the ________ of the probability distribution of possible results as shown below:

The _______ an asset's probability distribution, the lower its risk. Two useful measures of stand-alone risk are standard deviation and coefficient of variation. Standard deviation is a statistical measure of the variability of a set of observations as shown below:

If you have a sample of actual historical data, then the standard deviation calculation would be changed as follows:

The coefficient of variation is a better measure of stand-alone risk than standard deviation because it is a standardized measure of risk per unit; it is calculated as the ________ divided by the expected return. The coefficient of variation shows the risk per unit of return, so it provides a more meaningful risk measure when the expected returns on two alternatives are not _________ .

Quantitative Problem: You are given the following probability distribution for CHC Enterprises:

State of Economy Probability Rate of return

Strong 0.2 22%

Normal 0.5 9%

Weak 0.3 -4%

What is the stock's expected return? Do not round intermediate calculations. Round your answer to two decimal places.

%

What is the stock's standard deviation? Do not round intermediate calculations. Round your answer to two decimal places.

%

What is the stock's coefficient of variation? Do not round intermediate calculations. Round your answer to two decimal places.

blank 1: one porfolio, one asset, multiple assets

blank 2: risk, cost, return

blank 3: combined sum, standard deviation, weighted average

blank 4: wider, tighter, broader

blank 5: correlation coefficient, risk premium, standard deviation

blank 6: identical, different, correlated

Answer 1

blank 1: one asset

blank 2: risk

blank 3: weighted average

blank 4: tighter

blank 5: standard deviation

blank 6: identical

What is the stock's expected return? Do not round intermediate calculations. Round your answer to two decimal places.

7.70%

What is the stock's standard deviation? Do not round intermediate calculations. Round your answer to two decimal places.

9.10%

What is the stock's coefficient of variation? Do not round intermediate calculations. Round your answer to two decimal places.

1.18