Question 2 There are four Shares (A, B, C and D) in the market. The Economy face
ID: 2816503 • Letter: Q
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Question 2 There are four Shares (A, B, C and D) in the market. The Economy faces at least three different states (Boom, Normal and Recession) every year. The probability of each of these state occurring in given in the second column of the following table. The percentage return of each of the Share are given below: StateProbability of the of this state Economy occurring Boom % return on Shares if the Economic states occurs Share A 120.00 100.00 80.00 Share B 30.00 50.00 20.00 Share C 33.00 33.00 33.00 Share D 24.00 44.00 29.00 0.25 Normal 0.35 Recession0.40 Total 1.00 (a) Calculate the expected return (%) of each of the Share. Show your full workings. (marks 2) (marks 4) (c) Rank (l to 4) the Shares in terms of their risk-return relationship, Where 1 - Best and 4 -Worst. (b) Calculate the risk (96) of each of the Share. Show your full workings. (mark 0.50) (d) identify the reasons behind the variations in the risk (%) among the four shares. (mark 0.50)Explanation / Answer
Share A Expected return=0.25*120%+0.35*100%+0.40*(-80%)=33%
Share B Expected return=0.25*30%+0.35*50%+0.40*20%=33%
Share C Expected return=0.25*33%+0.35*33%+0.40*33%=33%
Share D Expected return=0.25*24%+0.35*44%+0.40*29%=33%
Share A standard deviation=sqrt(0.25*(120%-33%)^2+0.35*(100%-33%)^2+0.40*(-80%-33%)^2)=92.5797%
Share B standard deviation=sqrt(0.25*(30%-33%)^2+0.35*(50%-33%)^2+0.40*(20%-33%)^2)=13.0767%
Share C standard deviation=sqrt(0.25*(33%-33%)^2+0.35*(33%-33%)^2+0.40*(33%-33%)^2)=0%
Share D standard deviation=sqrt(0.25*(24%-33%)^2+0.35*(44%-33%)^2+0.40*(29%-33%)^2)=8.306624%
As each have same mean or expected returns, the higher the standard deviation or risk the worse it is
So,
Ranking
C-1
D-2
B-3
A-4
Reasons: Degree of variability around the mean
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