Bill broodiest star quarterback for the Spring BaySmashers would like to invest

Question

Bill broodiest star quarterback for the Spring BaySmashers would like to invest a small portion of his earnings in stocks of one of three firms.His estimated dividends and the probabilities of their occurence follow.

GALAXY COMMUNICATIONS                  GRASSHOPPER TRACTOR                           BREATHIEST ELECTRONICS

.1         $500                                                             .2       $0                                                         .1     $500

.3          $800                                                            .4       $700                                                     .2     $700

.4         $1000                                                          .4        $800                                                    .4       $900

.2         $1200                                                          .2        $900                                                    .2        $1100

                                                                                                                                                          .1       $1200

a).CALCULATE THE EXPECTED CASH FLOW FOR EACH

B.)CALCULATE THE COEFFICIENT OF VARIATION FOR EACH

c.)RANK FROM THE LEAST RISKY TO MOST RISKY

(grasshopper tractor doesnt add up to 1?)

Explanation / Answer

First we need to calculate the expected value of each investement: Galaxy: Expected return = 0.1 *$500 + 0.3*$800 + 0.4 * $1000 + 0.2 * $1200                          = $930 For Grass hoper: ER = 0.2 * $0 + $0.3 * $700 + $0.3 * $800 + 0.2 * $900       = $630 For Breathiest: ER = 0.1 * $500 + 0.2 * $700 + 0.4 * $900 + 0.2 * $1100 + 0.1 * 1200       = $890 Now, calculating the standard deviation for each firm: SD of Galaxy: SD = SQrt [ (500 - 875)^2 + (800 - 875)^2 + (1000 - 875)^2 + (1200 - 875)^2 / 4]       = Sqrt [ (140625 + 5625 + 15625 + 105625) / 4]      = Sqrt [ 66,875]      = 285.6 Calculating SD for Grass hoper: SD = Sqrt [ (0 - $600)^2 + ($700 - $600)^2 + ($800 - $600)^2 + ($900 - $600)^2 / 4]       = Sqrt [ 360,000 + 10,000 + 40,000 + 90,000 / 4]      = Sqrt [ 500,000 / 4]     = Sqrt[ 125,000]     = 353.55 Calculating the SD for Breathiest: SD = Sqrt [ (500 - 880)^2 + (700 - 880)^2 + (900 -880)^2 + (1100 - 880)^2 + (1200 - 880)^2 / 5]       = Sqrt [ 144,400 + 32,400 + 400 + 48,400 + $102,400 / 5]      = Sqrt [ 65,600]      = 256 Calculating the Coefficient of variation for each firm: For Galaxy: CV = 286 / 930       = 0.307 For Grasshoper: CV = 353.55 / 630       = 0.56 For Breathiest: CV = $256 / 890       = 0.28 The least risky investment is the Breathiest , the next riskiest is the Galaxy and the most riskiest is the Grasshoper

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