An investment will cost $1500 today. You have estimated the following probabilit

Question

An investment will cost $1500 today. You have estimated the following probability distribution for the value of the investment one year from now.

Probability Y

Value at end of the year

30%

$1,680.00

60%

$1,650.00

10%

$1,425

Calculate the expected rate of return and the standard deviation of the returns for the 1 year holding period.

Expected rate of return: 5.78% Std Dev: 10.96%

Expected rate of return: 8.9% Std Dev: 6.79%

Expected rate of return: 8.9% STD Dev: 16.95%

Expected rate of return: 5.78%, Std Dev: 7.06%

Probability Y

Value at end of the year

30%

$1,680.00

60%

$1,650.00

10%

$1,425

Explanation / Answer

Value Return Probability Expected Return Deviation Deviation ^ 2 Probability *Deviation ^ 2 1680 0.12 30% 0.036 0.029 0.000841 0.0002523 1650 0.1 60% 0.06 0.009 0.000081                                  0.0000486 1425 -0.05 10% -0.005 -0.141 0.019881 0.0019881 0.091 Variance = 0.002289 Expected Return one year from now = 0.091 Hence Expected return now   = 8.90% Standard Deviation = Variance ^2 6.79% Hence option B is correct

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