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measure of risk for given probability distribution of return

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Swift Manufacturing must choose between two asset purchases. The annual rate of return and the related probabilities given in the table.

Project 257 Project 432

Rate of return Probability Rate of return Probability

-10% 0.01 10% 0.05

10 0.04 15 0.10

20 0.05 20 0.10

30 0.10 25 0.15

40 0.15 30 0.20

45 0.30 35 0.15

50 0.15 40 0.10

60 0.10 45 0.10

70 0.05 50 0.05

80 0.04

100 0.01

a. For each project, compute

1. the range of possible rates of return
2. the expected value of return
3. the standard deviation of the returns
4. the coefficient of variation of the returns

b. Construct the bar chart of each distribution of rates of return

c. Which project would you consider less risky? why?

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Solution Summary

Answers several questions related to the measures of risk and return for a given probability distribution of return. The answer is explained in simple terms for easy understanding.

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See the attached Excel file. Go to the cell to see the specific formulas used for calculations. The text pasted here may not print correctly as some symbols and tables may not print correctly.

Project 257 Project 432

Rate of return (X) Probability (P) (X-mu)^2*P Rate of return (X) Probability ...

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