Consider the following investments: Investment Expected return Standard deviation A 5% 10% B 7% 11% C 6% 12% D 6% 10% Which would you prefer between the following pairs: a) A and D b) B and C c) C and D

Consider the following investments: Investment Expected return Standard deviation A 5% 10% B 7% 11% C 6% 12% D 6% 10% Which would you prefer between the following pairs: a) A and D b) B and C c) C and D

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter8: Risk And Rates Of Return

Section: Chapter Questions

Problem 5PROB

See similar textbooks

Related questions

Q: Compute the expected rate of return on investment i given the followinginformation: Rf = 8%; E(RM) =…

A: Expected rate of return is the minimum return which the investors would require for investing in a…

Q: Two investments, X and Y, have the characteristics shown below. E(X) = $70, E(Y)%3D$120, o =7,000, o…

A: Expected Return on Portfolio = (Weight of security X * Return on security X ) + (Weight of security…

Q: Which investment(s) should you choose, considering all the above criteria, if the cost of capital is…

A: NPV: It is the present worth of the cashflows including the initial cost of investment. IRR: It…

Q: (a) What is meant by the term correlation? What is meant by the term diversification? (b) Suppose…

A: Corrleation for second part is 0.96 To Find: Expected return Standard deviation

Q: Compute the expected rate of return on investment i, given the following information: Rf=9%;…

A: The expected rate of return refers to the minimum required rate by the investors for the investment.…

Q: What are the (a) expected return, (b) standard deviation, and (c) coefficient of variation for an…

A: Calculation of expected return, standard deviation and coefficient of variation: Excel workings:

Q: The information about asset X and Y are given as follows: Expected Standard Asset Return Deviation…

A: Here, Expected Return of X is 10% Standard Deviation X IS is 4% Expected Return of Y is 15% Standard…

Q: Assume that an investment is forecasted to produce the following returns: a 20% probability of a 12%…

A: We have the following information: Forecasted returns of an investment: 20% probability of a 12%…

Q: Part A: Compute the expected return, standard deviation, and value at risk for the following two…

A: The expected value of an investment is the weighted average of all possible returns of the…

Q: Consider two assets (1 & 2) with the following information: E (R1) = 10 %, σ1 = 10 %, E (R2) = 12 %,…

A: 1. Portfolio's expected return: Portfolio's expected return can be calculated with the following…

Q: Alternatives X and Y have rates of return of 10% and 18%, respectively. What is known about the rate…

A: It is not true that the highest rate of return always give a better investment result. The problem…

Q: An investment has the following possible returns: Return: 13%; Probability: 40% Return: 8%;…

A: The expected return is the minimum required rate of return which an investor required from the…

Q: Calculate the expected return. Do not round intermediate calculations. Round your answer to two…

A: The answers and the explanation can be seen below:

Q: Asset 1 Asset 2 Expected return 0.07 0.078 Standard deviation 0.1 0.2 if correlation is 0.4 weight 1…

A: In order to determine the risk and performance of the portfolio investors uses measures such as…

Q: Suppose there are two investments A and B. Either investment A or B has a 4.5% chance of a loss of…

A: Value at risk (VaR) is a financial statistic that evaluates an investment's risk. VaR is a…

Q: Two assets, Q & R, each have a standard deviation of 10%. Asset Q's expected return is 8.5% and…

A: The rate of return that an investor is expected to earn from the investment is term as the expected…

Q: a. Compute the expected rate of return on investment i given the following information: the market…

Q: Recall the definition of the correlation coefficient of two random variables, defined as AB PAB The…

A: Portfolio is a bundle of different investments. To reduce or decrease the risk, investors invest the…

Q: Consider an investment with the following probability distribution: Probability Payoff 0.40 30.0…

A: Probability is the expectation or estimate which is forecasted. For calculation of expected return,…

Q: Suppose that the returns on an investment are normally distributed with an expected return of 16%…

A: Z score = (Observed value - mean) / standard deviation Z score = (19%-16%) / 3% Z score = 3%/3% Z…

Q: Consider the following historical performance data for two different portfolios, the Standard and…

A: Hi, since you have posted a question with multiple sub-parts, we will answer the first three, as per…

Q: Let each decision variable, A, P, M, H, and G, represent the fraction or proportion of the total…

A: Hi There, thanks for posting the question. But as per Q&A guidelines, we must answer the first…

Q: I need help with this problem and want to set up for excel with formulas.

A: Value of Z at the 95% Confidence Level = 1.96 Calculation of expected return, standard deviation and…

Q: Compute the (a) expected return, (b) standard deviation, and (c) coefficient of variation for…

A: probability A return (return-expected return) (return-expected return)2 (return-expected return)2 x…

Q: Consider two assets. Suppose that the return on asset 1 has expected value 0.05 and standard…

A: Portfolio refers to basket of different financial assets in which investment is made by single…

Q: a. Calculate the average return over the 4-year period for each of the three alternatives. b.…

A: “Since you have posted a question with multiple subparts, we will solve first three subparts for…

Q: The expected annual returns are 15% for investment 1 and 12% for investment 2. The standard…

A: Here, Expected Annual Return of Investment 1 is 15% Expected Annual Return of Investment 2 is 12%…

Q: The following investments and probabilities are presented:…

A: An investor can determine the performance and riskiness of investment by evaluating expected return,…

Q: An asset has an average return of 10.11 percent and a standard deviation of 19.02 percent. What…

A: Here we will apply the empirical rule in finance using the statistical principles. As per the…

Q: Investment A has a 8.25% internal rate of return and Investment B has a 10.0% internal rate of…

A: Accept the project which has highest IRR then required return and/or alternative project. Reject the…

Q: Asset 1 has a standard deviation of returns of 0.15 while Asset 2 has a standard deviation of…

A: The covariance of return is product of coefficient of correlation and standard deviations of two…

Q: Consider the expected return and standard deviation of the following two assets: Asset 1:…

A: Here,

Q: Consider two assets A and B with expected return as 9% and 5%, respectively. Standard deviation of…

A: The expected return of Portfolio is calculated with the help of following formula Er(p) = Er (A) ×…

Q: Example 9: What is the portfolio standard deviation for a two-asset portfolio comprised of the…

A: Weight in asset A (Wa) = 40000 / (40000 + 60000) = 0.4 Weight in asset B (Wb) = 1 - 0.4 = 0.6…

Q: Two investments generated the following annual returns (refer to image): a. What is the average…

A: A statistical measure that represents the variation in the return on the stock is term as the…

Q: Assuming that the rates of return associated with a given asset investment are normally distributed;…

A: a) Calculation of standard deviation:Standard deviation is 0.3516.Standard deviation can be derived…

Q: Problem 2: For following payoff structure and correlation matrix Standard deviation Return Asset 1…

A: Here, Risk Free Rates are 4% and 1%

Q: three assets. The first one has expected return of 10% and standard deviation of return of 0.14.…

A: Every asset has some probability and return so that it's expected return (mean) and risk ( standard…

Q: Consider the following information on returns and probabilities: ▪ Invest 50% of your money in Asset…

A: Expected return of an asset is the minimum required rate of return that an investor expects from the…

Q: Q5. You are considering two assets with the following characteristics. Return Standard deviation…

A: Standard deviation is a variation in the mean value of given data. Standard deviation is a…

Q: Assume that Rf = 6 percent and the market risk premium (Km - Rf) is 7.0 percent. Compute Kj for the…

A: In this question we require to compute the Kj i.e. expected return.

Q: The asset's market risk premium is

A: Market risk premium = Return on market portfolio - Risk free rate of return

Q: Consider the following data: Expected Return Standard Deviation Russell Fund 16% 12% Windsor Fund…

A: Given: Particulars Return Standard deviation Russell Fund 16% 12% Windsor Fund 14% 10%…

Q: a. Use the following information: E[rXOM] = 15.6%, standard deviationXOM = 15.9% E[rMS]=29.7%,…

A: “Since you have posted a many questions, we will solve first question for you. To get the remaining…

Concept explainers

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.

Question

Consider the following investments:

Investment Expected return Standard deviation
A 5% 10%
B 7% 11%
C 6% 12%
D 6% 10%

Which would you prefer between the following pairs:
a) A and D
b) B and C
c) C and D

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step 3

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 3 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

APT An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free rate is 6%, the expected return on the first factor (r1) is 12%, and the expected return on the second factor (r2) is 8%. If bi1 = 0.7 and bi2 = 0.9, what is Crisp’s required return?
The standard deviation of return on investment a is 0.10, while the standard deviation of return on investment b is 0.04. If the correlation coefficient between the returns on A and B is_____________. A. -0.0447 B. -0.0020 C. 0.0020 D. 0.0447
Suppose that the returns on an investment are normally distributed with an expected return of 16% and standard deviation of 3%. What is the likelihood of receiving a return that is equal to or less than 19%? (Hint: the area under a curve for 1 std dev is 34.13%, 2 std dev is 47.73% and 3 std dev is 49.87%.).
Let each decision variable, A, P, M, H, and G, represent the fraction or proportion of the total investment placed in each investment alternative. Max 0.073A + 0.103P + 0.064M + 0.075H + 0.045Gs.t. A + P + M + H + G = 1 0.5A + 0.5P - 0.5M - 0.5H <= 0 -0.5A - 0.5P + 0.5M + 0.5H <= 0 -0.25M - 0.25H + G >= 0 -0.6A + 0.4P >= 0 A, P, M, H, G <= 0 a. What fraction of the portfolio should be invested in each type of security (A, P, M, H, G)?b. How much should be invested in each type of security?c. What are the total earnings for the portfolio?d. What is the marginal rate of return on the portfolio? That is, how much more could be earned by investing one more dollar in the portfolio? *Please use excel solver & show all steps**
For investment A, the probability of the return being 20.0% is 0.5, 10.0% is 0.4, and -10.0% is 0.1 Compute the standard deviation for the investment with the given information. (Round your answer to one decimal place.) a. 85.00% b. 15.00% c. 34.00% d. 17.00% e. 9.00%
An asset has an average return of 10.11 percent and a standard deviation of 19.02 percent. What range of returns should you expect to see with a 68 percent probability? Multiple Choice −18.42% to 38.64% −46.95% to 67.17% −8.91% to 11.31% −27.93% to 48.15% −8.91% to 29.13%
A portfolio consists of 70% of investment A and 30% of investment B. The expected returnon investment A is 7% and the expected return on investment B is 9%. The standarddeviation of returns of investment A is 2.19%. The standard deviation of returns ofinvestment B is 4.1%. The correlation coefficient of the returns of investment A andinvestment B=+1. Finda. the expected return from the portfoliob. the standard deviation (risk) of the returns from the portfolio
a. Compute the expected rate of return on investment i given the following information: the market risk premium is 5%; Rf = 6%; βi = 1.2. b. Compute E(RM).
Assuming that the rates of return associated with a given asset investment are normally distributed; that the expected return, r, is 18.7%; and that the coefficient of variation, CV, is 1.88, answer the following questions: a. Find the standard deviation of returns, sigma Subscript rσr. b. Calculate the range of expected return outcomes associated with the following probabilities of occurrence: (1) 68%, (2) 95%, (3) 99%.
Assume that an investment is forecasted to produce the following returns: a 20% probability of a 12% return; a 50% probability of a 16% return; and a 30% probability of a 19% return What is the standard deviation of return for this investment? A) 5.89% B) 16.1% C) 2.43% D) 15.7%
Steel Series Holdings has a number of investments. Investment X offers an 8% expected return with a standard deviation of 5%. Investment Y offers an 8% expected return with a standard deviation of 0%. Investment Z offers a 5% expected return with a standard deviation of 5%. According to standard economic theory it can be stated that a) X is a substitute for Y. b) Z is part of the efficient set. c) Z dominates X. d) Y dominates X. e) X dominates Y.
Normal probability distribution Assuming that the rates of return associated with a given asset investment are normally distributed; that the expected return, r, is 10.4%; and that the coefficient of variation, CV, is 1.01, answer the following questions: a. Find the standard deviation of returns, σr. b. Calculate the range of expected return outcomes associated with the following probabilities of occurrence: (1) 68%, (2) 95%, (3) 99%.