(Expected rate of return and risk) Syntex, Inc. is considering an investment in
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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?
Common Stock A
Common Stock B
Probability
Return
Probability
Return
0.35
10%
0.15
6%
0.30
16%
0.35
5%
0.35
21%
0.35
16%
0.15
21%
a.Given the information in the table, the expected rate of return for stock A is %.
(Round to two decimal places.)The standard deviation of stock A is %.
(Round to two decimal places.)
b.The expected rate of return for stock B is %.
(Round to two decimal places.)The standard deviation for stock B is %.
(Round to two decimal places.)
Common Stock A
Common Stock B
Probability
Return
Probability
Return
0.35
10%
0.15
6%
0.30
16%
0.35
5%
0.35
21%
0.35
16%
0.15
21%
Quiz: Chapter 7 QuizExplanation / Answer
Common stock A is a better investment as the expected return is higher than that of the common stock B and the deviation from the mean (standard deviation) is lower (i.e; 5.50%) than that of the common stock B.
Common stock A has higher expected return with lower risk.
Expected stock return is calculated as summation of the (probability * return)
Risk is measured using standrd deviation. It is calculated as sum of squares of (probabilty * return) or using stdev.s() function in Excel. It measures how much the return varies wach time from the mean value.
Common stock A Common stock B Probability Return Probability Return 0.35 10% 0.15 -6% 0.3 16% 0.35 5% 0.35 21% 0.35 16% 0.15 21% Expected Stock return 0.1565 0.096 std dev 0.055076 0.120277 Stock A Stock B return 15.65% 9.60% risk 5.50% 12.02% (a) (b)Related Questions
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