Please help with below problems, many thanks, Stock: A B C D Expected Return 5%

Question

Please help with below problems, many thanks,

Stock:                          A            B             C              D

Expected Return           5%         5%            7%           6%

Standard Deviation         10%       12%          12%          11%

Which of the following statements is true?

A. A is a better investment than B.

B. B is a better investment than C.

C. C is a better investment than D.

D. D is a better investment than C.

2. Use the following table:

States of Economy      Probability of the state      3-month T-Bill     Large-Company Stock Small-Comp Stock

Boom                              0.3                                   4                         10                                        30

Steady                             0.5                                  4                          5                                         20

Recession                        0.2                                  4                          0                                  10

What is the difference between the variances for large- and small-company stocks?

A. 40.25%

B. 36.75%

C. 27.30%

D. 14.90%

A. A is a better investment than B.

B. B is a better investment than C.

C. C is a better investment than D.

D. D is a better investment than C.

Explanation / Answer

1) Investment A is better than B because Investment B having high under the same return.

2)

Variance of large companies=0.3(10-5.5)2+0.5(5-5.5)2+0.2(0-5.5)2=12.25

Average return=10*0.3+5*0.5+0*.02=5.5

Variance of Small companies=0.3(30-21)2+0.5(20-21)2+0.2(10-21)2=49

Average return=30*0.3+20*0.5+10*0.2=21

Difference=12.25-49=36.75

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