An investor has $1000 available for a 1-year investment. The investor is considering the following three options: Option A Possible return 30%, 20%, 0%, -20% Probability 25%, 40%, 20%, 15% Option B Possible return 50%, 30%, 0%, -40% Probability 15%, 50% ,20% ,15% Option C Guaranteed return 10% Probability 100% i. Based on the expected returns, which of these options should the investor choose? ii. Compute the standard deviations for Option A and Option B. Which one of options A, B, and C has the least risk (i.e. the smallest standard deviation), which one has the highest risk? What can you say about the relationship between the expected returns and the risks of financial assets in the normal situation?

An investor has $1000 available for a 1-year investment. The investor is considering the following three options: Option A Possible return 30%, 20%, 0%, -20% Probability 25%, 40%, 20%, 15% Option B Possible return 50%, 30%, 0%, -40% Probability 15%, 50% ,20% ,15% Option C Guaranteed return 10% Probability 100% i. Based on the expected returns, which of these options should the investor choose? ii. Compute the standard deviations for Option A and Option B. Which one of options A, B, and C has the least risk (i.e. the smallest standard deviation), which one has the highest risk? What can you say about the relationship between the expected returns and the risks of financial assets in the normal situation?

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 19EA: Redbird Company is considering a project with an initial investment of $265,000 in new equipment...

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