Question

Hello,

I was having difficulty solving the attached problem on risk and return.

Can someone lend an assist?

9. Risk & Return Situation Asset A Situation Probability Returns Exp Ret Deviation Recession 0. 15 2 % Normal 0.55 10% Boom 0.30 15% Expected Return = Risk = Coefficient of Variation Asset A = Asset B Probability Returns Exp Ret D eviations 0.15 -30% 0.55 18% 0. 30 3 1% Expected Return = Coefficient of Variation Asset B = Asset A Asset B Parameters Expected returns Risk Coefficient of Variation

Answer 1

A B C D F G H Asset A Asset B 2 4.5 10.3 7 3 Situation Probability Returns Exp Ret Deviation (Exp Ret - 10.3) Probability Returns Exp Ret Deviation (Exp Ret - 14.7) 4 Recession 0.15 / 2 0.3 -8.3 0.15 -30 -4.5 -44.7 5 Normal 0.55 10 5.5 -0.3 0.55 18 9.9 3.3 6 Boom 0.30 15 4.7 0.30 31 9.3 16.3 Expected Return = 17.01 Expected Return = 14.7 385.41 8 Risk Risk Coefficient of Variation 60.55% Coefficient of Variation 3.81% 10 11 Formulae used 12 Asset A Risk By using +(B4* (E4)^2)+(B5*(E5)^2)+(B6*(E6)^2) Asset B Risk By using +(F4*(14)^2)+(F5*(15)^2)+(F6*(16)^2) 14 15 Coefficient of Correlation 16 Asset A By using +D7/E7 Asset B By using +H7/17 13 17