1. What is the approximate variance of returns if over the past 3 years an inves
ID: 2708360 • Letter: 1
Question
1. What is the approximate variance of returns if over the past 3 years an investment returned 8.0%, -12.0%, and 15.0%?
A. 31
B. 131
C. 182
D. 961
2. What is the approximate standard deviation of returns if over the past 4 years an investment returned 8.0%, -12.0%, -12.0%, and 15.0%?
A. 9.26%
B. 10.26%
C. 11.26%
D. 12.01%
3. A proposed capital project will cost $20 million and generate $4 million annually in after-tax cash flows for 10 years. The cost of capital for a project of this risk level is 12.2%. Should the project be accepted? Why or why not?
Explanation / Answer
!) Mean = ( 8-12+15)/3 = 11/3 %
Variance =1/3* [ (8-11/3)^2 + (-12-11/3)^2 + (15-11/3)^2 ] = 392.667/3 = 130.88
ans is 131
2) mean = (8-12-12+15)/4 = -1/4 %
Variance = 1/4* [ (8+1/4)^2 + (-12+1/4)^2 + (-12+1/4)^2 + (15+1/4)^2) = 144.1875
Standard deviation = sqrt(variance) = 12 %
3) NPV = -20 + 4/1.122 + 4/1.22^2 + ......+4/1.122^10
NPV = $2.417 million
NPV > 0
so accept the project
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