Wyse‐Tech Corporation

Wyse‐Tech Corporation is considering three possible capital projects

for next year. Each project has a one year life, and project returns
depend upon next year’s state of the economy. The estimated rates of
return are shown below:
State of the Probability of Rates of Return for Each Asset
Economy State Occurring if State Occurs
Asset A Asset B Asset C
Recession 0.25 10% 18% 10%
Average 0.50 14% 13% 12%
Boom 0.25 16% 9% 14%

Risk & Return

Workshop 2
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2 ki Pūrehuroa

Wyse‐Tech: Return Calculation Wyse‐Tech: Standard Deviations

Example 1. Calculate the expected return on Asset A. Example 2. Calculate the expected standard deviation of Asset A.

   Pr
n n 2
r   rj  Pr j (8.2) σ  rj r
j 1
j (8.3)
j 1

rA = 13.5%
σA = 2.2%

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3 ki Pūrehuroa 5 ki Pūrehuroa

Wyse‐Tech: Coefficient of Variation Wyse‐Tech: Implications & Explanations

Example 3a: Calculate the coefficient of variation for Assets A, B and C Example 4: If it were known that project B was negatively
correlated with other cash flows of Wyse‐Tech, whereas projects
σ A and C were positively correlated, how would this knowledge
CV = affect your answer to 3b) above?
r

CVA  0.16
Example 5: Assume that Wyse‐Tech is going to invest one‐third of
CVB  0.24 its available funds in each project. What is the expected rate of
CVC  0.12 return on the three‐asset portfolio?
= 12.92%

3b. Which project has the highest risk? Explain.

Te Kunenga Te Kunenga
7 ki Pūrehuroa 9 ki Pūrehuroa

1
 Wyse‐Tech: Portfolio
Example 6: Assume that the standard deviation of the above
three‐asset portfolio is 0.14%. Prove that the risk of this portfolio
is less than the weighted average of the standard deviations of
the three assets in the portfolio. Explain.

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11 ki Pūrehuroa