# Finance Problem: Basic Valuation

B5. (Expected return and risk) General Eclectic Corporation is considering three possible capital

investment projects. The projected returns depend on the future state of the economy as

given here.

a. Calculate each project's expected return, variance, and standard deviation.

b. Rank the projects on the basis of (1) expected return and (2) risk. Which project would

you choose?

PROJECTED RETURN

State of the Probability of

Economy Occurrence 1 2 3

Recession 0.20 10% 8% 12%

Stable 0.60 15 13 10

Boom 0.20 21 25 8

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#### Solution Preview

B5. (Expected return and risk) General Eclectic Corporation is considering three possible capital

investment projects. The projected returns depend on the future state of the economy as

given here.

a. Calculate each project's expected return, variance, and standard deviation.

b. Rank the projects on the basis of (1) expected return and (2) risk. Which project would

you choose?

PROJECTED RETURN

State of the Probability of

Economy Occurrence 1 2 3

Recession 0.20 10% 8% 12%

Stable ...

#### Solution Summary

This solution provides a detailed, step by step calculation of the given finance problem.