Chapter 8. Risk and Return

*Copyright © 2015 by McGraw Hill Education (India) Private Limited
Chapter 8 Risk and Return
The probability distribution of the rate of return on Monotech Limited is as follows :
Rate of Return Probability
5% 0.2
15% 0.4
25% 0.4
(i) What is the expected rate of return ?
a. 15%
b. 16%
c. 14%
d. 17%
e. None of the above
Working : 0.2 x 5 + 0.4 x 15 + 0.4 x 25

1 + 6 + 10 =17%
(ii) What is the standard deviation of the rate of return?
a. 7.48%
b. 6.56%
c. 8.14%
d. 5.25%
Working :
Σpidi2 = 0.2 (5 – 17)2 + 0.4 (15 – 17)2 + 0.4 (25 – 17)2
= 0.2 x 144 + 0.4 x 4 + 0.4 x 64
= 28.8 + 1.6 + 25.6
= 7.48%
Chandra: Financial Management, 9e

1
The probability distribution of the rate of return on Intech Limited is as follows :
10% 0.3
20% 0.5
30% 0.2
a. 14%
b. 16%
c. 20%
d. 19%
Working :
3 + 10 + 6 = 19%
3+
a. 6.8%
b. 8.5%
c. 7%
d. 9%
Working :
pidi2 = 0.3(10-19)2 + 0.5(20-19)2 + .2(30-19)2
= 0.3(81) + .5(1) + .2 (121)
= 24.3 + 0.5 + 24.2 = 49 = 7%

2
. The probability distribution of the rate of return on BMC Limited is as follows :
10% 0.3
15% 0.4
20% 0.3
(i) What is the expected rate of return?
a. 15%
b. 11%
c. 8%
d. 9%
Working :
0.03 + 0.06 + 0.06 = 15%
(ii) What is the standard deviation of the return?
a. 3.40%
b. 2.90%
c. 3.87%
d. 1.85%

3
Working :
( pidi2 )½ = 0.3( 10 – 15)2 + 0.4 ( 15 – 15 )0 + 0.3 ( 20 – 15 )2 ½
½
= 0.3 x 25 + 0.4 x 0 + 0.3 x 25
½
= 7.5 + 0 + 7.5 = 3.87%
4. The probability distribution of the rate of return on BDM Limited is as follows:
10 % 0.3
15 % 0.3
20 % 0.4
a. 15.5%
b. 19.8%
c. 22.4%
d. 20.5%
Working:
0.03 + 0.045 + 0.08 = 15.5%
a. 4.15%
b. 4.92%
c. 7.85%
d. 1.20%
4
Working:
( pidi2 )½ = [ 0.3 ( 10 – 15.5) + 0.3 ( 15 – 15.5)

2 2
+ 0.4 (20 – 15.5 )2 ] ½
= [ 0.3 x 30.25 + 0.3 x 0.25 + 0.4 x 20.25 ] ½
= [ 9.075 + 0.075 + 8.1 ] ½

= 4.15 %
5. The probability distribution of the rate of return on IMOX Limited is as follows:
10 % 0.3
15 % 0.5
25 % 0.2
(a) 20.2%
(b) 12.3%
(c) 15.5%
(d) 18.5%
(e) None of the above
Working: 3 + 7.5 + 5 = 15.5%

5
(a) 5.22%
(b) 3.50%
(c) 4.29%
(d) 9.23%
Working:
( pidi2 )½ = [0.3 ( 10 – 15.5) + 0.5 ( 15 – 15.5)

2 2
+ 0.2 (25 – 15.5 )2 ] ½
= [0.3 x 30.25 + 0.5 x 0.25 + 0.2 x 90.25 ] ½
= [9.08 + 0.125 + 18.05] ½

= 5.22%
6. The probability distribution of the rate of return on Goldman Limited is as follows:
60 % 0.2
40 % 0.3
20 % 0.5

6
(a) 25.0%
(b) 34.0 %
(c) 38.5 %
(d) 40.5 %
Working:
0.12 + 0.12 + 0.10 = 34 %
(a) 13.50%
(b) 14.52%
(c) 15.62%
(d) 16.38%
Working:
(pidi2)½ = [0.2 ( 60 – 34)2 + 0.3 ( 40 – 34)2 + 0.5 (20 – 34 )2 ] ½
½
= [0.2 x 676 + 0.3 x 36 + 0.5 x 196 ]
½
= [135.2 + 10.8 + 98] = 15.62%

7
7. The probability distribution of the rate of return on a company’s stock is as

follows:
20 % 0.3
30 % 0.3
40 % 0.4
a. 35.0 %
b. 31.0 %
c. 18.5 %
d. 22.3 %
Working:
0.06 + 0.09 + 0.16 = 31 %
a. 7.82 %
b. 10.34%
c. 12.25 %
d. 8.31 %

8
Working:
(pidi2 )½ = [0.3 ( 20 – 31)2 + 0.3 ( 30 – 31)2 + 0.4 (40 – 31 )2 ] ½
½
= [0.3 x 121 + 0.3 x 1 + 0.4 x 81 ]
½
= [36.3 + 0.3 + 32.4] = 8.31 %
The probability distribution of the rate of return on Monotech Limited is as follows :
5% 0.2
15% 0.4
25% 0.4
a. 15%
b. 16%
c. 14%
d. 17%
Working :
0.2 x 5 + 0.4 x 15 + 0.4 x 25

1 + 6 + 10 =17%

9
a. 7.48%
b. 6.56%
c. 8.14%
d. 5.25%
Working :
Σpidi2 = 0.2 (5 – 17)2 + 0.4 (15 – 17)2 + 0.4 (25 – 17)2
= 0.2 x 144 + 0.4 x 4 + 0.4 x 64
= 28.8 + 1.6 + 25.6
= 7.48%
9. The probability distribution of the rate of return on Sintech Limited is as follows :
10% 0.2
20% 0.3
30% 0.5
a. 23%
10
b. 14%
c. 21%
d. 19%
Working :
0.02 + 0.06 + 0.15 = 23%
a. 6.23%
b. 5.22%
c. 8.95%
d. 7.81%
Working :
[pidi2] ½ = [ 0.2(10-23)2 + 0.3(20-23)2 + 0.5 (30-23)] ½
½
= [0.2 x 169 + 0.3 x 9 + 0.5 x 49]
½
= [ 33.8 + 2.7 + 24.5]
= 7.81%

11
10.
The probability distribution of the rate of return on ABM Limited is as follows :
5% 0.2
10% 0.5
15% 0.3
a. 10.5%
b. 12.4%
c. 16.0%
d. 8.5%
Working :
0.01 + 0.05 + 0.045 = 10.5%

12
a. 4.26%
b. 5.25%
c. 2.80%
d. 3.50%
Working :
( Pi d i2) ½ = [0.2 (5-10.5)2 + 0.5 (10-10.5)2 + 0.3 (15-10.5)2 ]1/2
= (0.2 x 30.25 + .5 x 0.25 + 0.3 x 20.25)1/2
= (6.05 + 0.125 + 6.075) ½ = 3.50 %
11.
. The probability distribution of the rate of return on Inova Limited is as follows:
15 % 0.2
20 % 0.5
25 % 0.3
a. 18.5%
b. 17.8%
c. 21.4%
d. 20.5%
13
Working:
0.03 + 0.10 + 0.075 = 20.5%
a. 5.25 %
b. 3.50 %
c. 8.95 %
d. 4.20 %
Working:
( pidi2 )½ = [0.2 ( 15 – 20.5) + 0.5 ( 20 – 20.5)

2 2
+ 0.3 (25 – 20.5 )2 ] ½
= [0.2 x 30.25 + 0.5 x 0.25 + 0.3 x 20.25 ] ½
= [6.05 + 0.125 + 6.075] ½

= 3.5 %

14
12
The probability distribution of the rate of return on Investwise Limited is as follows:
20 % 0.4
30 % 0.3
25 % 0.3
a. 24.5%
b. 20.8%
c. 18.5%
d. 19.2%
Working:
0.08 + 0.09 + 0.075 = 24.5%

15
a. 4.15%
b. 3.80 %
c. 4.69 %
d. 7.23 %
Working:
( pidi2 )½ = [0.4 ( 20 – 24.5) + 0.3 ( 30 – 24.5)

2 2
+ 0.3 (25 – 24.5 )2 ] ½
= [0.4 x 20.25 + 0.3 x 30.25 + 0.3 x 0.25 ] ½
= [8.10 + 9.075 + 0.075] ½

= 4.15%
13. The probability distribution of the rate of return on the equity shares of Levers
Limited is as follows:
20 % 0.7
50 % 0.1
30 % 0.2

16
a. 25.0 %
b. 34.0 %
c. 38.5 %
d. 40.5 %
Working:
0.14 + 0.05 + 0.06 = 25 %
a. 16.50 %
b. 21.94 %
c. 9.22 %
d. 12.38 %
Working:
(pidi2)½ = [0.7 ( 20 – 25)2 + 0.1 ( 50 – 25)2 + 0.2 (30 – 25 )2 ] ½
½
= [0.7 x 25 + 0.1 x 625 + 0.2 x 25 ]
= 9.22 %

17
14. The probability distribution of the rate of return on a company’s stock is as

follows:
10 % 0.6
15 % 0.2
20 % 0.2
a. 14.5 %
b. 11.0 %
c. 13.0 %
d. 12.5 %
Working:
0.06 + 0.03 + 0.04 = 13 %

18
a. 4.00 %
b. 3.25 %
c. 5.25 %
d. 2.84 %
Working:
(pidi2 )½ = [0.6 (10 – 13)2 + 0.2 ( 15 – 13)2 + 0.2 (20 – 13 )2 ] ½
½
= [0.6 x 9 + 0.2 x 4 + 0.2 x 49]
= [5.4 + 0.8 + 9.8]½ = 4 %

19

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*Copyright © 2015 by McGraw Hill Education (India) Private Limited

Chapter 8 Risk and Return

The probability distribution of the rate of return on Monotech Limited is as follows :

Rate of Return Probability

(i) What is the expected rate of return ?

Working : 0.2 x 5 + 0.4 x 15 + 0.4 x 25

(ii) What is the standard deviation of the rate of return?

= 0.2 x 144 + 0.4 x 4 + 0.4 x 64

= 28.8 + 1.6 + 25.6

Chandra: Financial Management, 9e

The probability distribution of the rate of return on Intech Limited is as follows :

Rate of Return Probability

(i) What is the expected rate of return ?

(ii) What is the standard deviation of the rate of return?

= 0.3(81) + .5(1) + .2 (121)

= 24.3 + 0.5 + 24.2 = 49 = 7%

Chandra: Financial Management, 9e

. The probability distribution of the rate of return on BMC Limited is as follows :

Rate of Return Probability

(i) What is the expected rate of return?

0.03 + 0.06 + 0.06 = 15%

(ii) What is the standard deviation of the return?

Chandra: Financial Management, 9e

( pidi2 )½ = 0.3( 10 – 15)2 + 0.4 ( 15 – 15 )0 + 0.3 ( 20 – 15 )2 ½

4. The probability distribution of the rate of return on BDM Limited is as follows:

Rate of Return Probability

(i) What is the expected rate of return?

(ii) What is the standard deviation of the return?

( pidi2 )½ = [ 0.3 ( 10 – 15.5) + 0.3 ( 15 – 15.5)

= [ 0.3 x 30.25 + 0.3 x 0.25 + 0.4 x 20.25 ] ½

= [ 9.075 + 0.075 + 8.1 ] ½

5. The probability distribution of the rate of return on IMOX Limited is as follows:

Rate of Return Probability

(i) What is the expected rate of return?

Working: 3 + 7.5 + 5 = 15.5%

Chandra: Financial Management, 9e

(ii) What is the standard deviation of the return?

( pidi2 )½ = [0.3 ( 10 – 15.5) + 0.5 ( 15 – 15.5)

= [0.3 x 30.25 + 0.5 x 0.25 + 0.2 x 90.25 ] ½

= [9.08 + 0.125 + 18.05] ½

6. The probability distribution of the rate of return on Goldman Limited is as follows:

Rate of Return Probability

(i) What is the expected rate of return?

Chandra: Financial Management, 9e

0.12 + 0.12 + 0.10 = 34 %

(ii) What is the standard deviation of the return?

(pidi2)½ = [0.2 ( 60 – 34)2 + 0.3 ( 40 – 34)2 + 0.5 (20 – 34 )2 ] ½

Chandra: Financial Management, 9e

7. The probability distribution of the rate of return on a company’s stock is as

Rate of Return Probability

(i) What is the expected rate of return?

(ii) What is the standard deviation of the return?

Chandra: Financial Management, 9e

(pidi2 )½ = [0.3 ( 20 – 31)2 + 0.3 ( 30 – 31)2 + 0.4 (40 – 31 )2 ] ½

The probability distribution of the rate of return on Monotech Limited is as follows :

Rate of Return Probability

(i) What is the expected rate of return ?

0.2 x 5 + 0.4 x 15 + 0.4 x 25