Question

imagine that you purchased an asset for $54. imagine further that you are expecting the following returns over time $55, $60,$65,and $70, what will be your holding period return? suppose the possibilities that are associated with your expectations are 0.30,0.25,0.25.and 0.2, what will be your expected return? (b) estimate the variance and standard deviation (c) suppose the market and risk free rates are 6 and 4 percent respectively, what will be the sharpe ratio?

Answer 1

Hlding Period return depend on the duration of you holding the insturment. Sssuming the asset remains at $54, the HPR would be [(54-54)+(55+60+65+70)/54] = Approx 462.963 %. This again is aassuming that the above numbers are returns over time and no final value of the investment being provided.

Calculate Expected value is (0.3)(55)+(0.25)(60)+0.25(65)+(0.2)(70) = 61.75

Variance

Look at calculating the difference between every return you get and the expected value and then squaring every individual calculation done

Return 1 = 55 - 61.75 = -6.75    Squared = 45.5625

Return 2 = 60 - 61.75 = -1.75    Squared = 3.0625

Return 3 = 65 - 61.25 = 3.25 Squared = 10.5625

Return 4 = 70 - 61.25 = 8.25 Squared = 68.025

Total Variance is sum of all squared values = 127.25, while standard deviation = (127.25)^(1/2) = 11.2805