Risk n return_math
- 1. Risk n Return 1. There are two assets and three states o the economy: States of the Economy Probability Rate of Return Stock- A Stock- B Recession 0.15 0.28 0.32 Normal 0.35 0.32 0.35 Boom 0.25 0.55 0.45 Required: a. What are the expected return? b. What will be the variance? c. What will be the standard deviation or these two stocks?
- 2. 2. Microsoft Inc. is considering two mutually exclusive project X and project Y costing Tk. 80,000 and Tk. 95,000 respectively: Required: Expected Value of Two Projects. Standard Deviation of Two Projects. Project X Project Y Expected Cash inflows Probability Expected Cash inflows Probability 10,000 0.12 15,000 0.45 15,000 0.15 20,000 0.25 20,000 0.23 22,000 0.18 12,000 0.18 18,000 0.15 10,000 0.15 12,000 0.1
- 3. 3. LCD Company Ltd. Has to implement the 2 projects. Project X and Project Y. Initial investment is Tk. 80,000 Calculate riskiness of the project and suggest which project should be accepted and why? Project X Project Y Probability Expected Cash Inflows Probability Expected Cash Inflows 0.12 20,000 0.13 15,000 0.15 22,000 0.16 23,000 0.18 25,000 0.22 24,000
- 4. 4. Following are the probabilities and rate of return of three stocks: Required: • Expected Rate of Return for each stock. • Variance and standard deviation of each stock. Probability Rate of Return of Stocks A B C 0.22 0.25 0.18 0.04 0.28 0.15 0.10 0.08 0.32 0.12 0.09 0.12 0.18 -0.10 0.05 0.15 0.12 -0.14 0.03 0.25
- 5. 5. Standard deviation and expected rate of return of stock X is 0.05 and 0.15 respectively, whereas standard deviation and expected rate of return of stock Y is 0.08 and 0.18 respectively. Compute the co-efficient of variance and which project do you recommend?
- 6. 6. A company is considering a proposal to buy one of the two machines to manufacture a new commodity. Each of the machine requires investments of Tk. 50,000 and is expected to provide benefits over a period of 12 years. The firm has made pessimistic, most likely and optimistic estimates of the return associated with each of these alternatives. The estimates are as follows: Which projects do you consider more risky and why? Particulars Machine A Machine B Cost Tk. 50,000 Tk. 50,000 Cash flow estimates: Pessimistic 8,000 -------- Most Likely 12,000 10,000 Optimistic 16,000 20,000
- 7. 6. A company is considering a proposal to buy one of the two machines to manufacture a new commodity. Each of the machine requires investments of Tk. 50,000 and is expected to provide benefits over a period of 12 years. The firm has made pessimistic, most likely and optimistic estimates of the return associated with each of these alternatives. The estimates are as follows: Which projects do you consider more risky and why? Particulars Machine A Machine B Cost Tk. 50,000 Tk. 50,000 Cash flow estimates: Pessimistic 8,000 -------- Most Likely 12,000 10,000 Optimistic 16,000 20,000