Question

MBA 579 (Summer 2018) Homework: Chapter 7 Homework Save Score: 0 of 4 pts 4 of 8 (2 complete) HW Score: 23.08%, 6 P7-6 (similar to) Question Help * (Related to Checkpoint 7.1) (Expected rate of return and risk) B. J. Gautney Enterprises is evaluating a security. One-year Treasury bills are currently paying 4.0 percent. Calculate the investment's expected return and its standard deviation. Should Gautney invest in this security? Probability 0.20 0.40 0.20 0.20 Return -4% 3% 5% 9% a. The investment's expected return is?%. (Round to two decimal places.)

Answer 1

Requirement (a) – Investment’s Expected Return

Expected Return = Sum of [Returns x Probability]

= [-4% x 0.20] + [3% x 0.40] + [ 5% x 0.20] + [9% x 0.20]

= -0.80% + 1.20% + 1% + 1.80%

= 3.20%

Requirement (b) – The Investment Standard Deviation

Variance

= [(-4 – 3.20)² x 0.40] + [(3 – 3.20)² x 0.40] + [(5 – 3.20)² x 0.20] + [(9 – 3.20)² x 0.20]

= 10.37 + 0.02 + 0.65 +6.73

= 17.76

Therefore, Standard Deviation = Square Root of (17.76) = 4.21%

Requirement (c) – Should Goutney Invest in this security

The Investment Standard Deviation of 4.21% is more than the One Year Treasury Bills rate of 4%, therefore, it’s better not to invest in this security