MBA 579 (Summer 2018) Homework: Chapter 7 Homework Save Score: 0 of 4 pts 4 of 8
ID: 2619083 • Letter: M
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MBA 579 (Summer 2018) Homework: Chapter 7 Homework Save Score: 0 of 4 pts 4 of 8 (2 complete) HW Score: 23.08%, 6 P7-6 (similar to) Question Help * (Related to Checkpoint 7.1) (Expected rate of return and risk) B. J. Gautney Enterprises is evaluating a security. One-year Treasury bills are currently paying 4.0 percent. Calculate the investment's expected return and its standard deviation. Should Gautney invest in this security? Probability 0.20 0.40 0.20 0.20 Return -4% 3% 5% 9% a. The investment's expected return is?%. (Round to two decimal places.)Explanation / Answer
Requirement (a) – Investment’s Expected Return
Expected Return = Sum of [Returns x Probability]
= [-4% x 0.20] + [3% x 0.40] + [ 5% x 0.20] + [9% x 0.20]
= -0.80% + 1.20% + 1% + 1.80%
= 3.20%
Requirement (b) – The Investment Standard Deviation
Variance
= [(-4 – 3.20)2 x 0.40] + [(3 – 3.20)2 x 0.40] + [(5 – 3.20)2 x 0.20] + [(9 – 3.20)2 x 0.20]
= 10.37 + 0.02 + 0.65 +6.73
= 17.76
Therefore, Standard Deviation = Square Root of (17.76) = 4.21%
Requirement (c) – Should Goutney Invest in this security
The Investment Standard Deviation of 4.21% is more than the One Year Treasury Bills rate of 4%, therefore, it’s better not to invest in this security
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