You are confronted with the opportunity to participate in a project with the fol

Question

You are confronted with the opportunity to participate in a project with the following known distribution of returns:

State

Prob

Project ROR

1

1/4

20%

2

1/2

15%

3

1/4

-4%

A bank will allow you to borrow -- at 8% -- up to the amount of your own money that you commit to the project (i.e., if you invest, say $10 of your own money, you can borrow another $10 to do the same).

What will be the standard deviation of the ROR you will earn if you borrow the maximum amount?

You decide to invest $100 of your own funds and invest another $100 more of borrowed funds. What will be your wealth position at the project's close if state 3 occurs?

I need the answer as quickly as possible pease, thanks guys

State

Prob

Project ROR

1

1/4

20%

2

1/2

15%

3

1/4

-4%

Explanation / Answer

Solution:

If state 3 occurs, there will be a loss of 4 % on total investment i,e, 4 % * $ 100 + $ 100 = $ 8

States Probability Project ROR 1 0.25 20% 5.00% 2 0.5 15% 7.50% 3 0.25 -4% -1.00% Expected Return 11.50%

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