Question
In: Finance
The table below shows the returns and probabilities of 3 different financial assets (A, B, C)....
The table below shows the returns and probabilities of 3 different financial assets (A, B, C). Which financial asset should be preferred according to the Risk-Return analysis? (Coefficient of Change will be calculated over Standard Deviation / Expected Return.). You can use 4 digits after the comma in your calculations.
Possibility |
Return A |
Return B |
Return C |
|
0,10 |
(-)0,09 |
0,01 |
(-)0,20 |
|
0,35 |
0,08 |
0,05 |
(-)0,10 |
|
0,40 |
0,13 |
0,10 |
0,25 |
|
0,15 |
0,20 |
0,15 |
0,75 |
Solutions
Expert Solution
Financial Asset A :
| Possibility (P) | Return (x) | Px | x - mean of x | (x - mean)^2 | P*(x - mean)^2 |
| 0.1 | -9 | -0.9 | -19.1 | 364.81 | 36.481 |
| 0.35 | 8 | 2.8 | -2.1 | 4.41 | 1.5435 |
| 0.4 | 13 | 5.2 | 2.9 | 8.41 | 3.364 |
| 0.15 | 20 | 3 | 9.9 | 98.01 | 14.7015 |
| Mean | 10.1 | Variance | 56.09 |
Mean = 10.1%
Standard Deviation = Variance ^0.5 = 56.09^0.50 = 7.49 %
Financial Asset B :
| Possibility (P) | Return (y) | Py | y - mean of y | (y - mean)^2 | P*(y - mean)^2 |
| 0.1 | 1 | 0.1 | -7.1 | 50.41 | 5.041 |
| 0.35 | 5 | 1.75 | -3.1 | 9.61 | 3.3635 |
| 0.4 | 10 | 4 | 1.9 | 3.61 | 1.444 |
| 0.15 | 15 | 2.25 | 6.9 | 47.61 | 7.1415 |
| Mean | 8.1 | Variance | 16.99 |
Mean = 8.1%
Standard deviation = 16.99 ^0.5 = 4.12
Financial Asset C :
| Possibility (P) | Return (z) | Pz | z - mean of z | (z - mean)^2 | P*(z - mean)^2 |
| 0.1 | -20 | -2 | -35.75 | 1278.0625 | 127.8063 |
| 0.35 | -10 | -3.5 | -25.75 | 663.0625 | 232.0719 |
| 0.4 | 25 | 10 | 9.25 | 85.5625 | 34.2250 |
| 0.15 | 75 | 11.25 | 59.25 | 3510.5625 | 526.5844 |
| Mean | 15.75 | Variance | 920.6875 |
Mean = 15.75
Standard deviation = 920.69^0.5 = 30.24%
Coefficient of variation = standard deviation / mean
COV for A = 7.49 / 10.1 = 0.74
COV FOR B = 8.1/ 4.12 = 0.51
COV FOR C = 30.34 / 15.75 = 1.93
Financial asset will be preferred as per the COV as it has lowest COV.
jeff jeffy answered 1 year agoRelated Solutions
The table below shows the returns and probabilities of 3 different financial assets (A, B, C)....
The table below shows the returns and probabilities of 3
different financial assets (A, B, C). Which financial asset should
be preferred according to the Risk-Return analysis? (Coefficient of
Change will be calculated over Standard Deviation / Expected
Return.). You can use 4 digits after the comma in your
calculations.
Possibility
Return A
Return B
Return C
0.10
(-)0,09
0,01
(-)0,20
0.35
0,08
0,05
(-)0,10
0,40
0,13
0,10
0,25
0,15
0,20
0,15
0,75
I would appreciate if you show transactions
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A
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0 5%
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2
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Year
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2000
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2001
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2002
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2003
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2004
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2005
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2006
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2007
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2015
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2016
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