Question

Three assets – F G and H – are currently being considered by Polokwane industries. The probability distributions of expected returns for these assests are shown in the following table.

J	Prj	Return rj	Prj	Return rj	Prj	Return,rj
1	.10	40%	.40	35%	.10	40%
2	.20	10	.30	10	.20	20
3	.40	0	.30	-20	.40	10
4	.20	-5			.20	0
5	.10	-10			.10	-20

• Calculate the expected value of return r for each of the three assets which provides the largest expected return
• Calculate the standard deviation σ for each o the three assets returns – which appears to have the greatest risk
• Calculate the coefficient of variation , CV for each of the three assets return – which appears to have the creates relative risk.

Answer 1

Asset F
Probabilty	Return	Expected return	(Return-Expected Return)^2	Prob*((Return-Expected Return)^2)
0.1	0.4	0.04	0.1296	0.01296
0.2	0.1	0.04	0.0036	0.00072
0.4	0	0.04	0.0016	0.00064
0.2	-0.05	0.04	0.0081	0.00162
0.1	-0.1	0.04	0.0196	0.00196
Variance	0.0179
Standad Deviation	13.38%
Coefficient of Variation	3.34

Asset G
Probabilty	Return	Expected return	(Return-Expected Return)^2	Prob*((Return-Expected Return)^2)
0.4	0.350	0.110	0.0576	0.02304
0.3	0.100	0.110	0.0001	0.00003
0.3	-0.200	0.110	0.0961	0.02883
Variance	0.0519
Standad Deviation	22.78%
Coefficient of Variation	2.07

Asset H
Probabilty	Return	Expected return	(Return-Expected Return)^2	Prob*((Return-Expected Return)^2)
0.1	0.4	0.1	0.09	0.009
0.2	0.2	0.1	0.01	0.002
0.4	0.1	0.1	0	0
0.2	0	0.1	0.01	0.002
0.1	-0.2	0.1	0.09	0.009
Variance	0.022
Standad Deviation	14.83%
Coefficient of Variation	1.48