A game of chance offers the following odds and payoffs. Each play of the game costs $200, so the net profit per play is the payoff less $200. Probability Payoff Net Profit 0.10 $700 $500 0.50 300 100 0.40 0 –200 a-1. What is the expected cash payoff? (Round your answer to the nearest whole dollar amount.) a-2. What is the expected rate of return? (Enter your answer as a percent rounded to the nearest whole number.) b-1. What is the variance of the expected returns? (In the calculation, use the percentage values, not the decimal values for the rates of return. Do not round intermediate calculations. Round your answer to the nearest whole number.) b-2. What is the standard deviation of the expected returns? (Enter your answer as a percent rounded to 2 decimal places.)
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
A game of chance offers the following odds and payoffs. Each play of the game costs $200, so the net profit per play is the payoff less $200.
| Probability | Payoff | Net Profit |
| 0.10 | $700 | $500 |
| 0.50 | 300 | 100 |
| 0.40 | 0 | –200 |
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a-1. What is the expected cash payoff? (Round your answer to the nearest whole dollar amount.)
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a-2. What is the expected rate of return? (Enter your answer as a percent rounded to the nearest whole number.)
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b-1. What is the variance of the expected returns? (In the calculation, use the percentage values, not the decimal values for the
rates of return . Do not round intermediate calculations. Round your answer to the nearest whole number.) -
b-2. What is the standard deviation of the expected returns? (Enter your answer as a percent rounded to 2 decimal places.)
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