(Expectedrate of return and risk)
B. J. Gautney Enterprises is evaluating a security. One-year Treasury bills are currently paying 4.6%. Calculate the investment's expected return and its standard deviation. Should Gautney invest in this security?
Probability Return
0.20 -5%
0.40 4%
0.20 6%
0.20 10%
Expected Ret = Sum [ Prob * ret ]
Scenario | Prob | Ret | Expected Ret |
1 | 0.2 | -5% | -0.01 |
2 | 0.4 | 4% | 0.016 |
3 | 0.2 | 6% | 0.012 |
4 | 0.2 | 10% | 0.02 |
Expected Ret | 0.038 |
SD = SQRT [ [ Sum ( Prob * (X-AvgX)^2 ] ] ]
Scenario | Prob | Ret (X) | (X-Avg X) | (X-Avg X)^2 | Prob*(X-AvgX)^2 |
1 | 0.2 | -5% | -0.0880 | 0.0077 | 0.0015 |
2 | 0.4 | 4% | 0.0020 | 0.0000 | 0.0000 |
3 | 0.2 | 6% | 0.0220 | 0.0005 | 0.0001 |
4 | 0.2 | 10% | 0.0620 | 0.0038 | 0.0008 |
Sum [ Prob *(X-Avgx)^2 ] | 0.0024 | ||||
SD = SQRT [ Sum [ Prob *(X-Avgx)^2 ] ] | 0.0492 |
Pls comment, if any further assistance is required
(Expectedrate of return and risk) B. J. Gautney Enterprises is evaluating a security. One-year Treasury...
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