Joe is a new investor and has been closely watching a company by the name of USA Ltd., a pharmaceutical company aiming to develop a coronavirus vaccine. Joe believes the following returns are possible in 2022 and has attached a probability to each potential outcome: Probability Possible Return .20 185.00% .30 83.50% .30 -5.00% .20 -100.00% d) Joe is considering investing all his savings in buying shares in USA Ltd. Explain to Joe why he should not do this by referring to the risk/return trade-off and what action Joe can take to reduce some of the risk
Joe is a new investor and has been closely watching a company by the name of USA Ltd., a pharmaceutical company aiming to develop a coronavirus vaccine.
Joe believes the following returns are possible in 2022 and has attached a probability to each potential outcome:
|
Probability |
Possible Return |
|
.20 |
185.00% |
|
.30 |
83.50% |
|
.30 |
-5.00% |
|
.20 |
-100.00% |
d) Joe is considering investing all his savings in buying shares in USA Ltd. Explain to Joe why he should not do this by referring to the risk/return trade-off and what action Joe can take to reduce some of the risk
The return from a stock is highly volatile. There are four possible states of return with their probabilities. We will first calculate the expected return, standard deviation return and then coefficient of variation, CV.
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