8-10 LG 2: Assessing Return and Risk

a. Project 257
1. Range: 1.00 - (-.10) = 1.10
n
k̄ =∑ k i׿ P ri ¿
2. Expected return: i=1
Rate of Return Probability Weighted Value Expected Return
n
k̄ =∑ k i׿ P ri ¿
ki Pri ki x Pri i=1

-.10 .01 -.001

.10 .04 .004
.20 .05 .010
.30 .10 .030
.40 .15 .060
.45 .30 .135
.50 .15 .075
.60 .10 .060
.70 .05 .035
.80 .04 .032
1.00 .01 .010
1.00 .450
n

3. Standard Deviation:
σ=
√∑i=1
(k i− k̄ )
2
x Pri
ki k̄ k i− k̄ (k i− k̄) 2
Pri (k i− k̄) 2
x Pri

-.10 .450 -.550 .3025 .01 .003025

.10 .450 -.350 .1225 .04 .004900
.20 .450 -.250 .0625 .05 .003125
.30 .450 -.150 .0225 .10 .002250
.40 .450 -.050 .0025 .15 .000375
.45 .450 .000 .0000 .30 .000000
.50 .450 .050 .0025 .15 .000375
.60 .450 .150 .0225 .10 .002250
.70 .450 .250 .0625 .05 .003125
.80 .450 .350 .1225 .04 .004900
1.00 .450 .550 .3025 .01 .003025.
.027350
Project 257 = .027350 = .165378

. 165378
CV = =. 3675
4. . 450
Project 432

1. Range: .50 - .10 = .40

n
k̄ =∑ k i׿ P ri ¿
2. Expected return: i=1
Rate of Return Probability Weighted Value Expected Return
n
k̄ =∑ k i׿ P ri ¿
ki Pri ki x Pri i=1

.10 .05 .0050

.15 .10 .0150
.20 .10 .0200
.25 .15 .0375
.30 .20 .0600
.35 .15 .0525
.40 .10 .0400
.45 .10 .0450
.50 .05 .0250
1.00 .300

3. Standard Deviation:
σ=
√∑
i=1
(k i− k̄ )
2
x Pri
ki k̄ k i− k̄ (k i− k̄) 2
Pri (k i− k̄) 2
x Pri

.10 .300 -.20 .0400 .05 .002000

.15 .300 -.15 .0225 .10 .002250
.20 .300 -.10 .0100 .10 .001000
.25 .300 -.05 .0025 .15 .000375
.30 .300 .00 .0000 .20 .000000
.35 .300 .05 .0025 .15 .000375
.40 .300 .10 .0100 .10 .001000
.45 .300 .15 .0225 .10 .002250
.50 .300 .20 .0400 .05 .002000
.011250

Project 432 = .011250 = .106066

. 106066
CV = =. 3536
4. . 300
b. Bar Charts
Project 257

0.3
Rate of Return

0.25

0.2
Project 432

0.15
Probability
0.1

0.05

c.
0
-10% 10% 20% 30% 40% 45% 50% 60% 70% 80% 100%

Probability Summary
Statistics

Project 257
Project 432
Range
1.100 .400
Object 20

Expected Return ( k̄ ) 0.450 .300

Standard Deviation ( σ k ) 0.165 .106
Rate of Return
Coefficient of Variation (CV)0.3675 .3536

Since Projects 257 and 432 have differing expected values, the coefficient of variation
should be the criterion by which the risk of the asset is judged. Since Project 432 has a
smaller CV, it is the opportunity with lower risk.

∑ w j×b j
8-23 LG 5: Portfolio Betas: bp = j=1

a.
Portfolio A Portfolio B
Asset Beta wA wA x bA wB wB x bB
 1 1.30 .10 .130 .30 .39
2 0.70 .30 .210 .10 .07
3 1.25 .10 .125 .20 .25
4 1.10 .10 .110 .20 .22
5 .90 .40 .360 .20 .18
bA =.935 bB =1.11
b. Portfolio A is slightly less risky than the market (average risk), while Portfolio B is more
risky than the market. Portfolio B's return will move more than Portfolio A’s for a given
increase or decrease in market return. Portfolio B is the more risky.