Question

question 1

Given the following probability distribution, calculate the expected return. (express you answer as a percentage. Do not use the % symbol)

Probability     Outcome

30% 0%

40%               10%

30%               30%

Question 2

Given the following probability distribution, calculate the standard deviation.

Probability     Outcome

40%               -5%

40%               10%

20%               30%

18.79%

35.00%

12.88%

12.22%

Question 3

Given the following probability distribution, calculate the expected return.

Probability     Outcome

20%               5%

40%               10%

20%               15%

20%               20%

18.75%

50.25%

12.5%

12.0%

Answer 1

1). E(r) = [Pi x Ri]

= [0.3 x 0%] + [0.4 x 10%] + [0.3 x 30%] = 0% + 4% + 9% = 13%

2). E(r) = [Pi x Ri]

= [0.4 x (-5%)] + [0.4 x 10%] + [0.2 x 30%] = -2% + 4% + 6% = 8%

i = [{Pi x (E(r) - Ri)²}]^1/2

= [{0.4 x (8% + 5%)²} + {0.4 x (8% - 10%)²} + {0.2 x (8% - 30%)²}]^1/2

= [67.6%² + 1.6%² + 96.8%²]^1/2 = [166%²]^1/2 = 12.88%

Hence, Option "C" is correct.

3). E(r) = [Pi x Ri]

= [0.2 x 5%] + [0.4 x 10%] + [0.2 x 15%] + [0.2 x 20%] = 1% + 4% + 3% + 4% = 12%

Hence, Option "D" is correct.