market in recent years and noticed the following when the economy is booming

# Market in recent years and noticed the following when

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market in recent years and noticed the following: when the economy is booming, the bonds are returning 2%; when steady returning 5% and when recession returning 10%. James also has calculated the probabilities of these economic states to happen as below: Economic state Probability of econ. state P x Return in econ. state R x Expected return for each econ. state ´ R Variance of returns for each econ. state σ 2 (P x )(R x ) (R x - ´ R ) 2 (P x ) Boom 25% 2% 0.50% 0.000264 Steady 55% 5% 2.75% 0.000003 Recession 20% 10% 2.00% 0.000451 E(R) for corporate bonds ´ R = 5.25% Std. dev. of E(R) σ ² = 0.00071875 σ = 0.0268 or 2.68% Required . Using the information provided by James so far, finish up measuring the expected return and risk of the bond. Fill in the table with appropriate calculations to arrive at the expected return and risk. Answer . See the filled in table above.
7. Part A . Estimates of the possible returns from investing in the common stock of Rosy Corporation are given as such: Probability of occurrence Possible return 0.05 -5% 0.11 0% 0.19 8% 0.30 19% 0.19 30% 0.11 40% 0.05 50% Required find the expected return on this stock investment and its respective risk (standard deviation); Answer. Expected return , E( ´ R )=(0.0025)+0+0.0152+0.057+0.057+0.044+0.025=0.1957 or 19.57% Standard deviation , σ = i = 1 n ( R ´ R ) 2 P (-0.05-0.1957) 2 *0.05+(0-0.1957) 2 *0.11+(0.08-0.1957) 2 *0.19+(0.19-0.1957) 2 *0.30+(0.30- 0.1957) 2 *0.19+(0.40-0.1957) 2 *0.11+(0.50-0.1957) 2 *0.05= 0.0210 =0.1449 or 14.5% Part B . Now, suppose you have heard about other new, but potentially growing companies called Daisy Industries and Lilly Bloomy. You want to weigh your options in investing in either of these companies (Rosy Corporation, Daisy Industries and Lilly Bloomy). The estimates of returns are as follows for the new companies: Daisy Industries Lilly Bloomy Probability Possible return 0.01 -10% 0.11 2% 0.20 11% 0.36 20% 0.20 28% 0.11 39% 0.01 48% Probability Possible return 0.07 0% 0.10 5% 0.19 15% 0.28 25% 0.19 33% 0.10 41% 0.07 50%
Required : compare and contrast the expected returns and risks (coefficient of variation) of above 3 stocks. As a risk averse investor, which company would be your best alternative to invest?

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• Fall '17
• David Perry
• Daisy Industries, Lilly Bloomy

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