Suppose you have a project that has a 0.8 chance of doubling your investment in a...

Question

Question

Suppose you have a project that has a 0.8 chance of doubling your investment in a year and a 0.2 chance of halving your inves

Answer 1

Answer #1

Probability of Doubling = P₁ = 0.80

Return on Doubling = R₁ = 100%

Probability of halving = P₂ = 0.20

Return on halving = R₂ = -50%

Expected Return = ER = P₁R₁ + P₂R₂ = 0.80*1 + 0.20*(-0.50) = 0.70

Standard Deviation = sqrt [ P₁(R₁-ER)² + P₂(R₂-ER)² ]

= sqrt [ 0.80(1-0.70)² + 0.20(-0.50-0.70)² ]

= 0.6000

Answer 2

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