MGT201 GDB Solution spring 27 May 2011

[Vuhelper]

Solution:
a) Expected rate of return
Expected ROR = < r > = pi ri
= p1 (r1) + p2 (r2) + p3 (r3) + p4(r4) + p5(r5)
= 0.010 ( -10%) + 0.450 ( 20%) + 0.320 ( 45%) + 0.140(60%) + 0.080 (100%)
= - 0.1% + 9% + 14.4% + 8.4% + 8 %
= 39.7%
b) The standard deviation of the returns
Risk = Std Dev = ( r i - < r i > )2 p i
= Std Dev = δ = √ Σ (r i - < r i >)2 p i.
= √{[(-10-39.7)2 (0.010)] + [(20-39.7)2 (0.0.450)] + [(45-39.7)2 (0.320)] + [(60-39.7)2(0.140) + [(100-39.7)2(.080) }
=√ (24.7009 + 174.6405 + 8.9888 + 57.6926 + 290.8872)
= √ (556.91)
=√557
Standard Deviation, δ = 23.5989
c) Coefficient of variation , CV = Standard Deviation = 23.5989 / 39.7
Expected Return
= 0.5944
d) Coefficient of Variation tells us about the Risk per unit Return. The project which offers lowest per unit risk is the best investment. 0.5944 > 0.5. The new investment offer the CV of 0.50 which is lower than calculated CV in part (iii) is 0.5944. Choose the Project with the Lowest CV i-e CV=0.5. As it carries the lowest Risk per unit Return than 0.5944.