You are considering investing in a project with the following possible outcomes:
Probability of Investment
Calculate the expected rate of return and standard deviation of returns for this investment,respectively.
A) 8.72%, 12.99%
B) 7.35%, 12.99%
C) 3.50%, 1.69%
D) 2.18%, 1.69%

Question

You are considering investing in a project with the following possible outcomes:
Probability of Investment
 Calculate the expected rate of return and standard deviation of returns for this investment,respectively.
A) 8.72%, 12.99% 
B) 7.35%, 12.99% 
C) 3.50%, 1.69% 
D) 2.18%, 1.69%

Quizplus · Accepted Answer

To calculate the expected rate of return, we multiply each possible outcome by its respective probability and add them together.

Expected rate of return = (0.3 x 15%) + (0.5 x 9%) + (0.2 x 4%) = 8.7%

To calculate the standard deviation of returns, we first need to calculate the variance, which is the weighted average of the squared deviations from the expected return.

Var = (0.3 x (15%-8.7%)^2) + (0.5 x (9%-8.7%)^2) + (0.2 x (4%-8.7%)^2) = 0.047

The standard deviation is then the square root of the variance.

Std Dev = sqrt(0.047) = 0.1299 or 12.99%

Therefore, choice A is the best choice as it gives the highest expected rate of return with a reasonable level of risk.

You Are Considering Investing in a Project with the Following