Computing the expected rate of return and risk) After a tumultuous period in the

Question

Computing the expected rate of return and risk) After a tumultuous period in the stock market Logan Morgan is considering an investment in one of two follows, which investment is better, based on risk (as measured by the standard deviation) and return as measured by the expected rate of return portfolios. Given the information Portfolio A Portfolio B Probability Probability 0 20 0.50 0.30 Return -2% 19% 25% 0.10 0.30 0.40 0 20 Return 5% 7% 12% 14% (Round to two decimal places,) a. The expected rate of retun for portolio A i The standard deviation of portfolio A is%. (Round to two decimal places) b.The expected rate of return for portfolio B is The standard deviation for portfolio B· Click to select your answerls) % (Round to two decirnal places ) (Round to two decinal places

Explanation / Answer

a. Expected return of porfolio A = 0.2*-2% + 0.5*19% + 0.30*25% = 16.6%

Std. deviation of A is calculated as follows:

Standard deviation of portfolio A = 9.66%

b. Expected return of portfolio B = 0.1*5% + 0.3*7% + 0.4*12% +0.2*14% = 10.20%

Std. deviation of Bis calculated as follows:

Standard deviation of portfolio A = 3.16%

Correct answer is C: Based on risk, B is better and based on return alone , A is better

Probability ( P ) Returns ( R ) ( R - E ( R ) ) ( R - E ( R ) )^2 ( R - E ( R ) )^2*P 0.2 -0.02 -0.186 0.034596 0.0069192 0.5 0.19 0.024 0.000576 0.000288 0.3 0.25 0.084 0.007056 0.0021168 Expected return E ( R ) 0.166 Variance 0.009324 Std. deviation 9.66%

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