Chapter 7 Risk and Return Prob and Soln - Chapter 7 Solutions Questions and Problems BASIC 7.1 Returns Describe the difference between a total holding

# Chapter 7 Risk and Return Prob and Soln - Chapter 7...

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Chapter 7 - Solutions Questions and Problems BASIC 7.1 Returns: Describe the difference between a total holding period return and an expected return. LO 2, LO3 Solution: The holding period return is the total return over some investment or “holding” period. It consists of a capital appreciation component and an income component. The holding period return reflects past performance. The expected return is a return that is based on the probability-weighted average of the possible returns from an investment. It describes a possible return (or even a return that may not be possible) for a yet- to-occur investment period. 7.3 Expected returns: You have chosen biology as your college major because you would like to be a medical doctor. However, you find that the probability of being accepted into medical school is about 10 percent. If you are accepted into medical school, then your starting salary when you graduate will be \$300,000 per year. However, if you are not accepted, then you would choose to work in a zoo, where you will earn \$40,000 per year. Without considering the additional educational years or the time value of money, what is your expected starting salary as well as the standard deviation of that starting salary? LO 3 Solution: E(salary) = 0.9(\$40,000) + (0.1) (\$300,000) = \$66,000