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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