Suppose that a security costs $1,500 today. a Calculate the percentage return on

Question

Suppose that a security costs $1,500 today.

a Calculate the percentage return on the security if the payoff to the security in one year is $1,000, $1,500, $2,000, or $2,500. (Note: This is the total amount returned to the investor, so you may just calculate the total return and not worry about how this is split up between current yield and capital-gains yield.)


b If each of the outcomes in part a is equally likely, calculate the expected return on the security.


c Calculate the standard deviation of the return on the security. (Again, assume that each of the outcomes in part a is equally likely.)

Explanation / Answer

a)% return for $1000 = 1000-1500 / 1500 = -33.33% $1500 = 0% $2000 = 33.33% $2500 = 66.66% b)expected return on security = (33.33 + 0 + 33.33 + 66.66 ) / 4 = 16.665% c)standard deviation = 38.682% i calculated standard deviation using this link u may try http://easycalculation.com/statistics/standard-deviation.php

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