Chapter 5 Solutions

# Chapter 5 Solutions - 1 9 12 12 7 9 12 30 2 2 2 2 =-c Risk...

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Chapter 5 Solutions to Assigned Problems: 2. a. Possibilities Probability Return Return * Probability 1 ½ -30% -15% 2 ½ +40% +20% Expected Return = ½(40%) + ½(-30%) = 5% Standard Deviation = % 35 %) 5 30 ( 2 / 1 %) 5 40 ( 2 / 1 2 2 = - - + - b. Possibilities Probability Return Return * Probability 1 0.1 -90% -9% 2 0.4 -30% -12% 3 0.4 +40% +16% 4 0.1 +100% +10% Expected Return = 0.1(-90%) + 0.4(-30%) + 0.4(40%) +0.1(100%) = 5% Standard Deviation = % 8 . 52 %) 5 100 ( 1 . 0 %) 5 40 ( 4 . 0 %) 5 30 ( 4 . 0 %) 5 90 ( 1 . 0 2 2 2 2 = - + - + - - + - - 5. a. Expected Value = 0.2(\$1000)(1+30%) + 0.7(\$1000)(1+12%) + 0.1(\$1000)(1- 15%) = \$1129 Expected Return = 0.2(30%) + 0.7(12%) + 0.1(-15%) = 12.9% b. Standard Deviation = % 7 . 11 %) 9 . 12 15 (
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Unformatted text preview: 1 . %) 9 . 12 12 ( 7 . %) 9 . 12 30 ( 2 . 2 2 2 =--+-+-c. Risk Premium = 12.9% - 7% = 5.9% 7. Yes, because the investment in problem 5 rises in value during high growth and normal growth and falls in value during a recession, while the investment in problem 7 rises in value during a recession and during normal growth and falls in value during high growth. Because these two investments have opposing payoffs (when one does poorly, the other does well), investing in both of them can reduce your overall risk....
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