You are considering investing in a project with the following possible outcomes:
Calculate the expected rate of return and standard deviation of returns for this investment.
A)9.8%,7.0%
B)7.0%,43.6%
C)8.3%,6.6%
D)8.3%,16.1%

Question

You are considering investing in a project with the following possible outcomes: 
Calculate the expected rate of return and standard deviation of returns for this investment.
A)9.8%,7.0% 
B)7.0%,43.6% 
C)8.3%,6.6% 
D)8.3%,16.1%

Quizplus · Accepted Answer

To find the expected rate of return, we add up the possible outcomes (in millions) multiplied by their respective probabilities:

(0.7 x 10) + (0.3 x 15) = 3 + 4.5 = 7.5

Then we divide by the total investment:

7.5 / 100 = 0.075 = 7.5%

To find the standard deviation, we first need to calculate the variance:

[0.7 x (10 - 7.5)^2] + [0.3 x (15 - 7.5)^2] = 2.625

Then we take the square root of the variance to get the standard deviation:

sqrt(2.625) = 1.62%

Therefore, the expected rate of return is 8.3% and the standard deviation is 6.6%. The best choice is C.

You Are Considering Investing in a Project with the Following