5. Asset A Asset B Asset C ri prob ri prob ri prob - 20% 0.20 - 40% 0.60 - 40% 0
ID: 2775930 • Letter: 5
Question
5.
Asset A
Asset B
Asset C
ri
prob
ri
prob
ri
prob
- 20%
0.20
- 40%
0.60
- 40%
0.40
0%
0.20
40%
0.40
10%
0.20
10%
0.30
50%
0.40
20%
0.10
40%
0.20
(a) Find the expected return E(r) for each investment
(b) Find the standard deviation of return for each investment
(c) Comment on the nature of the risk-return tradeoff given your answers to parts a and b above
Asset A
Asset B
Asset C
ri
prob
ri
prob
ri
prob
- 20%
0.20
- 40%
0.60
- 40%
0.40
0%
0.20
40%
0.40
10%
0.20
10%
0.30
50%
0.40
20%
0.10
40%
0.20
Explanation / Answer
Return Asset A 9.0% Asset B -8.0% Asset C 6.0% Asset A Asset B Asset c -0.04 -0.24 -0.16 0 0.16 0.02 0.03 0.2 0.02 0.08 Stadard deviation 4.38% 28.28% 18.00% The higher the risk the higher the return. Asset A is more stable in nature and will give a stable return its volatility is very less Asset B is highly volatile and its returns will vary a lot Asset c is in between asset a and b its volatility is moderate.
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