Question

Miriam’s Investment Choices: Investment A

Investment A		Investment B
Probability	Returns	Probability	Returns
0.30	11.0%	0.40	15.0%
0.40	15.0%	0.25	20.0%
0.30	19.0%	0.15	18.0%
		0.20	8.0%

Calculate the coefficient of variation for investment A

Answer 1

Calculation of expected return of Investment A:
	Probability(a)	Return(%) (b)	(a)*(b)
	0.3	11	3.3
	0.4	15	6
	0.3	19	5.7
	Expected Return		15.0
Therefore expected return of Investment A is 15%
Calculation of standard deviation of Investment A:
	Probability(a)	Return(%) (b)	(return- expected return)	(return- expected return)^2 (b)	(a*b)
	0.3	11	-4	16	4.8
	0.4	15	0	0	0
	0.3	19	4	16	4.8
					9.6
Standard deviation of Investment A= (9.6)^1/2= 3.10
Coefficient of variation =standard deviation/expected return=3.10/15=0.21