In answering the following questions, it is given that the potential investment

Question

In answering the following questions, it is given that the potential investment has the following range of possible outcomes and probabilities: 15% probability of a -20% return, 20% probability of a 10% return, 30% probability of a 20% return,
20% probability of a 40%, and 15% probability of a 70% return.
(a) Calculate the weighted mean of the probability distribution;
(b) Calculate the variance of the probability distribution; (c) Calculate the standard deviation of the probability distribution. (d) Calculate the coefficient of variation of the probability distribution. (e) Would another investment having a coefficient of variation of 0.25 have less risk per unit of expected return?

Explanation / Answer

(a)weighted mean= (.15x-20)+(.2x10)+(.3x20)+(.2x40)+(.15x70)= 23.5% (b) variance of the probability distribution= S.d^2= 702.75 (c) standard deviation = 26.509 (D)coefficient of variation= SD/meanx100= (26.509/23.5)x100= 112.80 (e) yes.

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