Question

B.J. Gautney Enterprises is evaluating a security. Given the following information regarding the possible return on security over the next year, calculate the expected return and the standard deviation of returns. Should Gautney invest in this security? One-year Treasury Bonds currently paying 2.9% annual interest. Probabiltiy Return 0.15 -3% 0.30 2% 0.40 4% 0.15 6%

Answer 1

PROBABILITY (A)	RETURN (B)	EXPECTED RETURN (A) x (B)	(RETURN - ER)2	P x (RETURN - ER)2
0.15	-3	- 0.45	31.9225	4.79
0.30	2	0.60	0.4225	0.13
0.40	4	1.60	1.8225	0.73
0.15	6	0.90	11.2225	1.68
		2.65		7.33

EXPECTED RETURN (ER)= 2.65%

VARIANCE = 7.33%

STANDARD DEVIATION = = 2.71%

NO, investment should not be made in this security because risk in higher than return.