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4. What is the expected return on an IBM bond if the return is 3% one fifth of the time, 10% two fifths of the time, 12% one fifth of the time, and 8% the rest of the time? Variance = o? - Probability state (Returnstate 1 -Rexpected) Standard Deviation = c = V02 a. Estimate the Variance and Standard Deviation (Just fill in the table below). (1) (2) (3) (4) 15) R P n Ri-Rexpected (R-Rrected) (Re-Rexpected . PT LT TOTAL: VARIANCE STANDARD DEVIATION- b. Determine the ranges of your return with 68, 95 and 99 percent probability. Show your work in a normal distribution chart. Normal Distribution C. Is this a risky asset? Why?

Answer 1

A)

R: 3% 109 12% 8% Pri 1/5 / / / Ri - Respected (R; - Respected) -5.6% 31-36 1.4% 1.96 3.4% 11.56. 0.6% 0.36 Total : VARIANCE STANDARD DEVIATION (Ri - Respected) is 6:22 0.784 2.312 o 072 9.44% : 3.02. Rexpected I Prix Ri = (15 x 3) + (216 x 10) + (23 x 12)+ (%5x3) 0.6 + 4+ 2.4 + 1.6 2 8.6%

Therefore Variance is 9.44%

Standard Deviation is 3.072%

B)

DATE: (PAS NO deviation Two Standard deviation One Standard Tone Standard duration - 00 Standoad deviation - - 15.534-3.022) 3534. 8.6.v. T. , .74.7. 11.67+ 3 072) (8. 673.072) '18.6+3.022) .. There and 8 is 7. 68% probability for having 10%. returns. i.e., 34% for being 10% 43% each. There and is 12% 95% returns probability for having 3%

C) There is more probability for the return of asset to be more than expected returns (i.e., 8.6%) hence the asset is a less risky asset.