Chapter_10_sol_students

Considerthefollowingprobabilitydistributionofreturnsfo

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Unformatted text preview: ( R − E [ R ])2 D) E[R] = ∑ R PR × R B) SD(R) = Answer: A Explanation: A) SD(R) = Var ( R ) B) C) D) Diff: 2 Topic: 10.2 Common Measures of Risk and Return Skill: Conceptual Use the table for the question(s) below. Consider the following probability distribution of returns for Alpha Corporation: Current Stock Stock Price in Price ($) One Year ($) $35 $25 $25 $20 Return R 40% 0% -20% Probability PR 25% 50% 25% 5) The standard deviation of the return on Alpha Corporation is closest to: A) 22.4% B) 19.0% C) 21.8% D) 19.4% Answer: C Explanation: A) B) C) E[R] = R PR × R = .25(40%) + .50(0%) + .25(-20%) = 5% ∑ Var(R) = ∑ R PR × ( R − E [ R ]) 2 = .25(.40 - .05)2 + .50(.00 - .05)2 + .25(-20 - .05)2 = .0475 or 4.75% SD(R) = Var ( R ) = .0475 = .2179 or 21.79% D) Diff: 3 Topic: 10.2 Common Measures of Risk and Return Skill: Analytical 10.3 Historical Returns of Stocks and Bonds 6) Which of the following statements is false? A) The standard error provides an indication of how far the sample average might deviate from the expected return. B) The 95% confidence interval for the expected return is defined as the Historical Average Return plus or minus three standard errors. C) We can use a securityʹs historical average return to estimate its actual expected return. D) The standard error is the standard deviation of the average return. Answer: B Explanation: A) B) The 95% confidence interval for the expected return is defined as the Historical Average Return plus or minus two stan...
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