Concept explainers
Expected return and standard deviation A game of chance offers the following odds and payoffs. Each play of the game costs $100, so the net profit per play is the payoff less $100.
What are the expected cash payoff and expected
To compute: The expected payoff and expected rate of return.
Explanation of Solution
The formula to calculate expected payoff is as follows:
The computation of expected payoff is as follows:
Hence, the expected payoff is $100
The formula to calculate rate of return is as follows:
The calculation of rate of return is as follows:
The formula to calculate expected rate of return is as follows:
The calculation of expected rate of return is as follows:
Hence, the expected rate of return is 0%.
To compute: The variance and standard deviation of rate of return.
Explanation of Solution
The formula to calculate variance is as follows:
The computation of variance is as follows:
Hence, the variance is 20,000.
The formula to compute standard deviation is as follows:
The computation of standard deviation is as follows:
Hence, the standard deviation is 141.42%.
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Chapter 7 Solutions
International Edition---principles Of Corporate Finance, 12th Edition
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