Question

(Expectedrate of return and risk​)

  B. J. Gautney Enterprises is evaluating a security. ​ One-year Treasury bills are currently paying 4.6%. Calculate the​ investment's expected return and its standard deviation. Should Gautney invest in this​ security?

Probability     Return

0.20                -5%

0.40                4%

0.20                6%

0.20                10%

Answer 1

Expected Ret = Sum [ Prob * ret ]

Scenario	Prob	Ret	Expected Ret
1	0.2	-5%	-0.01
2	0.4	4%	0.016
3	0.2	6%	0.012
4	0.2	10%	0.02
Expected Ret			0.038

SD = SQRT [ [ Sum ( Prob * (X-AvgX)^2 ] ] ]

Scenario	Prob	Ret (X)	(X-Avg X)	(X-Avg X)^2	Prob*(X-AvgX)^2
1	0.2	-5%	-0.0880	0.0077	0.0015
2	0.4	4%	0.0020	0.0000	0.0000
3	0.2	6%	0.0220	0.0005	0.0001
4	0.2	10%	0.0620	0.0038	0.0008
Sum [ Prob *(X-Avgx)^2 ]					0.0024
SD = SQRT [ Sum [ Prob *(X-Avgx)^2 ] ]					0.0492

Pls comment, if any further assistance is required