Answer exercise topic 6:

No.1:
1) I would say that Jason should select investment A. This is because investment A has a
high expected return which is 14% and a low standard deviation of A which is only 7%.
This means that investment A will pay at least 7%.
2) If Jason were risk averse, then he should choose investment A because higher expected
return and lower standard deviation. That means investment A will pay for at least 7%.
3) If Jason were risk seeking, I would suggest he should pick investment C because have
low expected return and high risk. The standard deviation is 9% which means he will pay
at least 9%.
4) I would say he would choose investment A because Jason are a risk seeking as compared
to their current investment that shows the coefficient of variance is 0.5.

No.2:
The stock of Petronus Bhd has a higher risk premium and a greater expected return, despite the
fact that it has less total risk. The firms systematic risk is crucial determinant of an assets
expected return. This means that this company has high value of systematic risk.

No.3:
1) Expected return = S ( Ri )( Pi )

Expected return of A = (0.10 x 0.1) + (0.20 x 0.07) + (0.40 x 0.15) +

(0.20 x 0.20) + (0.10 x 0.40)
= 0.001 + 0.02 + 0.06 + 0.04 + 0.04
= 0.161
= 16.1%

Expected return of B = (0.20 x 0.02) + (0.20 x 0.07) +

(0.30 x 0.12) + (0.20 x 0.15) + (0.10 x 0.16)
= 0.004 + 0.014 + 0.036 + 0.03 + 0.016
= 10%
2) Standard deviation : P(R – E(R))^2

Standard deviation stock A:

= 0.10 x (0.10-0.161)^2 + 0.20 x(0.10-0.161)^2 + 0.40x (0.15-0.161)^2 + 0.20 x
(0.20-0.161)^2 + 0.10 x (0.40- 0.161)^2
= 0.00037 + 0.00074 + 0.000048 + 0.0003 + 0.0057
= 0.00116
√0.00116
=0.034
= 3.4%

Standard deviation stock B

=0.20(0.02-0.10)^2 + 0.20(0.07-0.10)^2 + 0.30(0.12-0.10)^2 + 0.20(0.15-0.10)^2 +
0.10(0.16 – 0.10)^2
=0.00128 + 0.00018 + 0.00012 + 0.0005 + 0.00036
= 0.00244
√0.00244
= 0.049
= 4.9%
3) Stock B will be more risk because it has less expected return and high risk. The standard
deviation is higher than stock A which is 4.9%