Question

A financial manager must choose between four alternative Assets: 1, 2, 3, and 4. Each asset costs $35,000 and is expected to provide earnings over a three-year period as described below.
Assets Year 1 Year 2 Year 3
1 $21,000 $15,000 $6,000
2 9,000 15,000 21,000
3 3,000 20,000 19,000
4 6,000 12,000 12,000

which asset should the manager choose Based on the (i) profit maximization goal, (ii) the lowest volatility

Answer 1

Standard deviation (SD) is a reflection of volatility; SD formula = ((Sigma xi-mean)^2/n)^1/2

where xi is the data point

mean = avg of all data points

n is the no of data point

All units in $

Asset	Y1 earning	Y2 earning	Y3 earning	Total earning	Mean Earning	Standard deviation (volatility) formula	Standard deviation value
1	21000	15000	6000	42000	14000	(((21000-14000)^2+(15000-14000)^2+(6000-14000)^2)/3)^(1/2)	6164.41
2	9000	15000	21000	45000	15000	(((9000-15000)^2+(15000-15000)^2+(21000-15000)^2)/3)^(1/2)	4898.98
3	3000	20000	19000	42000	14000	(((3000-14000)^2+(20000-14000)^2+(19000-14000)^2)/3)^(1/2)	7788.88
4	6000	12000	12000	30000	10000	(((6000-10000)^2+(12000-10000)^2+(12000-10000)^2)/3)^(1/2)	2828.43

Based on the (i) profit maximization goal: the answer is the max total earning of 45000$ (asset 2)

Based on the (ii) the lowest volatility goal: the answer is the lowest standard deviation of 2828.43 (asset 4)