Answer:

Variance:

Variance is a basic mathematical concept that helps in analysis. The variation found in a set of data from its mean is quantified by using this measure. It is ascertained by first deducting the mean from each value, and after that squaring, summing and averaging the distinctions to create the dispersion.

Reason of using variance as a measure of risk:

When we consider a lower risk in investment, less deviation in returns is been estimated and vice versa if the risk are higher. In order to measure the overall extent of the risk present in such an investment, variance is been used. Variance also tells about the relation of mean value which is expected rate of return with actual rate of returns over the period.

Advantage and disadvantages of risk measure through variance:

The various advantages of risk measurement through variance are:

• It makes computation easier for ascertaining the risk in an investment.

• It is one of the key measures of asset allocation.

• It helps investor in emerging best portfolios by optimizing the return volatility trade off in investment portfolios.

The various disadvantages of risk measurement through variance are:

• When variance is used for computation, the resultant outcome of higher and lower expected returns are considered same.

• The interpretation of these data is not an easy task.

Answer:

In a lease agreement the lessee has to pay a fixed rent for using the property of the lessor at the agreed upon rent.

For any lease agreement, a minimum amount of rent is paid by the tenant. The rent which is paid above the fixed rent in the lease is known as 'overage'. The rent is calculated as a percentage of the sales incurred by the tenant. This occurs only when the sales exceeds the predetermined breakeven. Hence in this case the total rent would be the summation of minimum rent and the overage rent.

Answer:

Internal rate of return (IRR):

It is the rate at which the sum of cash outflows and cash inflow values becomes zero at initial year. This rate helps to determine the selection of a project. If the internal rate of return of a project comes higher than the company's required rate of return, then company takes the project.

Computation of expected return:

Expected return can be computed with the help of estimated before tax internal rate of return (BTIRR) and the probability percentage in each state of economy.

For Investment I:

Estimated BTIRR for investment I in optimistic state of economy is

, in most likely state is

, and in pessimistic state is

. Probability percentage in optimistic state is

, in most likely state is

, in pessimistic state is

Calculation of expected return is given in below excel.

Fig (1)

The resultant figure from the excel sheet is given below.

Fig (2)

Computation of expected return:

Expected return can be computed with the help of estimated before tax internal rate of return (BTIRR) and the probability percentage in each state of economy.

For Investment II:

Estimated BTIRR for investment II in optimistic state of economy is

, in most likely state is

, and in pessimistic state is

. Probability percentage in optimistic state is

, in most likely state is

, in pessimistic state is

Calculation of expected return is given in below excel.

Fig (3)

The resultant figure from the excel sheet is given below.

Fig (4)

Hence, the expected return for investment I is

and of investment II is

Computation of variance and standard deviation:

Calculate the difference between estimated and expected return, square the resultant deviation, then multiply it with the probability percentage and at last sum of all the product will be the variance. To calculate the standard deviation, under root the value of variance.

For Investment I:

Estimated BTIRR for investment I in optimistic state of economy is

, in most likely state is

, and in pessimistic state is

. Probability percentage in optimistic state is

, in most likely state is

, in pessimistic state is

Calculation of variance and standard deviation is given in below excel.

Fig (5)

The resultant figure from the excel sheet is given below.

Fig (6)

For Investment II:

Estimated BTIRR for investment II in optimistic state of economy is

, in most likely state is

, and in pessimistic state is

. Probability percentage in optimistic state is

, in most likely state is

, in pessimistic state is

Calculation of variance and standard deviation is given in below excel.

Fig (7)

The resultant figure from the excel sheet is given below.

Fig (8)

Hence, the variance and standard deviation for investment I is

and

respectively, and of investment II is

and

respectively.

Comparison between Investment I and II:

The projected BTIRR is higher for Investment II by

. Standard deviation is moreover high for investment II vs. investment I by

. According to the calculated data, Investment II has a higher expected BTIRR but is also riskier. It cannot be concluded that which among these two investments is better one. It can be said that Investment II dominates Investment I because in none of the scenario the returns of Investment II are lower than Investment I.