Question

B. J. Gautney Enterprises is evaluating a security. One-year Treasury bills are currently paying 4.7 percent. Calculate the investment's expected return and its standard deviation. Should Gautney invest in this security?

Probability Return

0.10 -6%

0.45 4%

0.35 5%

0.10 10%

Answer #1

Hello Sir/ Mam

Economy | Probability | Returns | P*R | (Return - Mean)^2 * P |

Boom | 10% | -6.00% | -0.600% | 0.0009900 |

Good | 45% | 4.00% | 1.800% | 0.0000001 |

Poor | 35% | 5.00% | 1.750% | 0.0000386 |

Bust | 10% | 10.00% | 1.000% | 0.0003660 |

Mean | 3.95% | 0.00139 | ||

S.D. | 3.73% |

This stock has an mean return of 3.95% with S.D. 3.73% whilst we can invest in T-bill @ 4.7%. Hence, we will not invest in this investment.

I hope this solves your doubt.

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