Question

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

Answer 1

EXPECTED RETURN CALCULATION FROM FINANCIAL ASSET A =

Expected Return = SUM (Return_i x Probability_i)

Possible return from A (Xi)	Probability P(Xi)	Xi P(Xi)
-0.09	0.10	-0.009
0.08	0.35	0.028
0.13	0.40	0.052
0.20	0.15	0.03
	X	0.101

STANDARD DEVIATION OF  FINANCIAL ASSET A

Deviation (Xi-X)	DEVIATION SQUARED (Xi-X)2	Product (Xi-X)2 * P(Xi)
-0.19	0.036481	0.0036481
-0.021	0.000441	0.00015435
0.029	0.000841	0.0003364
0.10	0.009801	0.00147015
	x2	0.005609

STANDARD DIVIATION = SQUIRE ROOT OF X² = 0.07

CO- EFFICENT OF CHANGE OF ASSET A = STANDARD DEVIATION/ EXPECTED RETURN

= 0.07/ 0.101 =0.6931

EXPECTED RETURN CALCULATION FROM FINANCIAL ASSET B

Possible return from B (Xi)	Probability P(Xi)	Xi P(Xi)
0.01	0.10	0.001
0.05	0.35	0.018
0.10	0.40	0.040
0.15	0.15	0.023
	X	0.081

STANDARD DEVIATION OF  FINANCIAL ASSET B

Deviation (Xi-X)	DEVIATION SQUARED (Xi-X)2	Product (Xi-X)2 * P(Xi)
-0.07	0.005041	0.0005041
-0.031	0.000961	0.00033635
0.019	0.000361	0.0001444
0.07	0.004761	0.00071415
	x2	0.001699

STANDARD DIVIATION = SQUIRE ROOT OF X² = 0.04

CO- EFFICENT OF CHANGE OF ASSET B = STANDARD DEVIATION/ EXPECTED RETURN

=0.04/0.081 = 0.4938

EXPECTED RETURN CALCULATION FROM FINANCIAL ASSET C

Possible return from C (Xi)	Probability P(Xi)	Xi P(Xi)
-0.20	0.10	-0.020
-0.1	0.35	-0.035
0.25	0.40	0.100
0.75	0.15	0.113
	X	0.1575

  STANDARD DEVIATION OF  FINANCIAL ASSET C

Deviation (Xi-X)	DEVIATION SQUARED (Xi-X)2	Product (Xi-X)2 * P(Xi)
-0.36	0.12780625	0.012780625
-0.2575	0.06630625	0.023207188
0.0925	0.00855625	0.0034225
0.59	0.35105625	0.052658438
	x2	0.09206875

STANDARD DIVIATION = SQUIRE ROOT OF X² = 0.30

CO- EFFICENT OF CHANGE OF ASSET C = STANDARD DEVIATION/ EXPECTED RETURN

= 0.30/0.1575 = 1.9048

HERE THEEXPECTED RETURN FROM EACH INVESTMENT ARE :

ASSET A = 0.101

ASSET B = 0.081

ASSET C = 0.157

BASED ON EXPECTED RETURN THE ASSET C GIVES MORE RETURN

VOLATILITY OF ASSETS

ASSET A = 0.07

ASSET B = 0.04

ASSET C = 0.30

ASSET B IS LESS VOLATILE AS COMPARED TO THE OTHER TWO,