Expected rate of return and risk) Syntex, Inc. is considering an investment in o

Question

Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and return? (Round to two decimal places.)

Common Stock A Common Stock B

Probababilty Return Probability Return

.35 12% .25 -6%

.30 17 .25 8

.35 18 .25 13

.25 20%

Given the information in the table, what is the expected rate of return for stock A?

What is the standard deviation of stock A?

What is the expected rate of return for stock B?

Based on the risk (as measured by the standard deviation) and return of each stock which investment is better?

Explanation / Answer

Expected Return Standard Deviation Stock -A 15.6 2.67 Stock-B 8.8 9.52 Investment in Stock A is better due to higher return and minimum risk. Common Stock A: Probability Return (%) Expected return (%) Variance 0.35 12 4.2 Return Expected Return Difference Probability Variances 0.3 17 5.1 a b c=a-b c^2 0.35 18 6.3 12 15.6 (3.6) 13.0 0.35 4.54 17 15.6 1.4 2.0 0.3 0.59 Total 15.6 18 15.6 2.4 5.8 0.35 2.02 Total 7.14 Variance = 7.14 Standard Deviation = 2.67 Common Stock B: Probability Return (%) Expected return (%) Variance 0.25 (6) (1.5) Return Expected Return Difference Probability Variances 0.25 8 2.0 a b c=a-b c^2 0.25 13 3.3 (6) 8.8 (14.8) 219.0 0.25 54.76 0.25 20 5.0 8 8.8 (0.8) 0.6 0.25 0.16 Total 8.8 13 8.8 4.2 17.6 0.25 4.41 20 8.8 11.2 125.4 0.25                 31.36 Total 90.69 Variance = 90.69 Standard Deviation = 9.52

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