Prob. Return (%) B 0.1 40 G 0.2 30 O 0.3 15 L 0.2 2 S 0.2 -12 where B-Bloom,G-Good, O-Ok, L-Level and S- Slump Probability(p(x)) Return(x) (%) x*p(x) x2*p(x) B 0.1 40 0.1*40=4 0.1*402=160 G 0.2 30 0.2*30=6 0.2*302=180 O 0.3 15 0.3*15=4.5 0.3*152=67.5 L 0.2 2 0.2*2=0.4 0.2*22=0.8 S 0.2 -12 0.2*-12=-2.4 0.2*(-12)2=28.8 Expected return==E(x)=∑x*p(x)=4+6+4.5+0.4-2.4 =12.5% Variance of return=E(x2)-[E(x)]2 E(x2)=∑x2p(x)=160+180+67.5+0.8+28.8 = 437.1 Variance= 437.1-(12.5)2 = 280.85 sd of return= 280.85 = 16.76% The expected return on Granny's gold investment is 12.5% The sd of return on Granny's gold investment is 16.76% 1. In your own words, define the two components of total risk? Give examples of both risks. 2. How is beta estimated or calculated?
Prob. Return (%) B 0.1 40 G 0.2 30 O 0.3 15 L 0.2 2 S 0.2 -12 where B-Bloom,G-Good, O-Ok, L-Level and S- Slump Probability(p(x)) Return(x) (%) x*p(x) x2*p(x) B 0.1 40 0.1*40=4 0.1*402=160 G 0.2 30 0.2*30=6 0.2*302=180 O 0.3 15 0.3*15=4.5 0.3*152=67.5 L 0.2 2 0.2*2=0.4 0.2*22=0.8 S 0.2 -12 0.2*-12=-2.4 0.2*(-12)2=28.8 Expected return==E(x)=∑x*p(x)=4+6+4.5+0.4-2.4 =12.5% Variance of return=E(x2)-[E(x)]2 E(x2)=∑x2p(x)=160+180+67.5+0.8+28.8 = 437.1 Variance= 437.1-(12.5)2 = 280.85 sd of return= 280.85 = 16.76% The expected return on Granny's gold investment is 12.5% The sd of return on Granny's gold investment is 16.76% 1. In your own words, define the two components of total risk? Give examples of both risks. 2. How is beta estimated or calculated?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
|
Prob. |
Return (%) |
|
|
B |
0.1 |
40 |
|
G |
0.2 |
30 |
|
O |
0.3 |
15 |
|
L |
0.2 |
2 |
|
S |
0.2 |
-12 |
where B-Bloom,G-Good, O-Ok, L-Level and S- Slump
|
|
Probability(p(x)) |
Return(x) (%) |
x*p(x) |
x2*p(x) |
|
B |
0.1 |
40 |
0.1*40=4 |
0.1*402=160 |
|
G |
0.2 |
30 |
0.2*30=6 |
0.2*302=180 |
|
O |
0.3 |
15 |
0.3*15=4.5 |
0.3*152=67.5 |
|
L |
0.2 |
2 |
0.2*2=0.4 |
0.2*22=0.8 |
|
S |
0.2 |
-12 |
0.2*-12=-2.4 |
0.2*(-12)2=28.8 |
Expected return==E(x)=∑x*p(x)=4+6+4.5+0.4-2.4
=12.5%
Variance of return=E(x2)-[E(x)]2
E(x2)=∑x2p(x)=160+180+67.5+0.8+28.8
= 437.1
Variance= 437.1-(12.5)2
= 280.85
sd of return= 280.85
= 16.76%
The expected return on Granny's gold investment is 12.5%
The sd of return on Granny's gold investment is 16.76%
1. In your own words, define the two components of total risk? Give examples of both risks.
2. How is beta estimated or calculated?
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