Question

In: Finance

Mr. James is a Finance Director with a risk-averse type in making financial decisions. The list...

Mr. James is a Finance Director with a risk-averse type in making financial decisions. The list below is a list of 4 investment alternatives that Mr. Andi needs to decide.

Asset

Initial Investment

Pessimistic Scheme

Moderate Scheme

Optimistic Scheme

A

100.000

16%

24%

28%

B

   100.000

10%

24%

26%

C

   100.000

6%

24%

30%

D

   100.000

22%

24%

28%

Which asset will Mr James take? Explain why?

Solutions

Expert Solution

Computation of Mean return

Scheme

Asset A

Asset B

Asset C

Asset D

Pessimistic

16.00%

10.00%

6.00%

22.00%

Moderate

24.00%

24.00%

24.00%

24.00%

Optimistic

28.00%

26.00%

30.00%

28.00%

Total returns

68.00%

60.00%

60.00%

74.00%

Mean ---> Total returns / no. of schemes

22.67%

20.00%

20.00%

24.67%

Standard Deviation of Asset A

Scheme

Asset A

Mean return

Deviation from return

Square of deviation from return

Pessimistic

16.00%

22.67%

-6.67%

0.44%

Moderate

24.00%

22.67%

1.33%

0.02%

Optimistic

28.00%

22.67%

5.33%

0.28%

Step1 : Sum of square of deviation from return

0.75%

Step2 : Step 1/ No. of schemes

0.25%

Step 3: Standard Deviation ---> Square root of Step 2

4.99%

Standard Deviation of Asset B

Scheme

Asset B

Mean return

Deviation from return

Square of deviation from return

Pessimistic

10.00%

20.00%

-10.00%

1.00%

Moderate

24.00%

20.00%

4.00%

0.16%

Optimistic

26.00%

20.00%

6.00%

0.36%

Step1 : Sum of square of deviation from return

1.52%

Step2 : Step 1/ No. of schemes

0.51%

Step 3: Standard Deviation ---> Square root of Step 2

7.12%

Standard Deviation of Asset C

Scheme

Asset C

Mean return

Deviation from return

Square of deviation from return

Pessimistic

6%

20.00%

-14.00%

1.96%

Moderate

24%

20.00%

4.00%

0.16%

Optimistic

30%

20.00%

10.00%

1.00%

Step1 : Sum of square of deviation from return

3.12%

Step2 : Step 1/ No. of schemes

1.04%

Step 3: Standard Deviation ---> Square root of Step 2

10.20%

Standard Deviation of Asset D

Scheme

Asset D

Mean return

Deviation from return

Square of deviation from return

Pessimistic

22%

24.67%

-2.67%

0.07%

Moderate

24%

24.67%

-0.67%

0.00%

Optimistic

28%

24.67%

3.33%

0.11%

Step1 : Sum of square of deviation from return

0.19%

Step2 : Step 1/ No. of schemes

0.06%

Step 3: Standard Deviation ---> Square root of Step 2

2.49%

Asset

Mean return

Standard deviation

A

22.67%

4.99%

B

20.00%

7.12%

C

20.00%

10.20%

D

24.67%

2.49%

Mr. James takes Asset D as it has the highest mean return among all the assets. Also Asset D scores well on the risk side as it has the lowest standard deviation among the assets.

Hope this helps you answer the question. Please provide your feedback or rating on the answer.

Thanks

jeff jeffy answered 1 year ago
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