CFIN -STUDENT EDITION-TEXT
CFIN -STUDENT EDITION-TEXT
6th Edition
ISBN: 9781337407359
Author: BESLEY
Publisher: CENGAGE L
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Chapter 8, Problem 1PROB
Summary Introduction

Expected rate of return is the anticipated profit or loss of an investment to be received by the investor. It is computed by expecting the probabilities of a maximum range of returns on an investment.

Standard deviation is the financial measure of risk and stability on the investment returns.

Coefficient of variance is a measure used to calculate the total risk per unit of return of an investment.

CFIN -STUDENT EDITION-TEXT, Chapter 8, Problem 1PROB

Expert Solution & Answer
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Explanation of Solution

Calculate the expected return as follows:

Expected return=[Probability×Payoff]               =(0.2×19%)+(0.7×9%)+(0.1×4%)       =3.8%+6.3%+0.4% =10.5%

Therefore, the expected return is 10.5%.

Calculate the standard deviation as follows:

Standard deviation=Probability×(PayoffExpected return)2=(0.2×(19%10.5%)2)+(0.7×(9%10.5%)2)+(0.1×(4%10.5%)2)             =(0.2×(8.5%)2)+(0.7×(1.5%)2)+(0.1×(6.5%)2)         =(0.2×72.25%)+(0.7×2.25%)+(0.1×42.25%)=14.45%+1.575%+4.225% =20.25%         =4.5%           

Therefore, the standard deviation is 4.5%.

Calculate the coefficient of variance as follows:

Coefficient of variance=Standard deviationExpected return      =4.5%10.5%          =0.429 or 4.29%

Therefore, the coefficient of variance is 4.29%.

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