Beruflich Dokumente
Kultur Dokumente
State of
Economy
Boom
Normal
Recession
State of
Economy
Boom
Normal
Recession
Expected Rate
of Return (%)
Expected Rate
of Return (%)
F p= wi f i
i =1
where:
Exercise 2: DEF Properties is evaluating two opportunities, each having the same initial
investment. The projects risk and return characteristics are shown below:
Project A
Project B
Expected Return
0.10
0.20
Proportion invested in each
0.50
0.50
project
What is the expected return portfolio combining Project A and project B?
STANDARD DEVIATION
- A statistical measure of the variability of a probability distribution around its
expected value.
- It is calculated as follows:
1. Compute the expected value (f)
2. Subtract (f) fromeach possible return to obtain the deviations (ri f)
3. Square each deviation (ri f)2
4. Multiply each squared deciation by its probability of occurrence, pi(ri f)2, and
then add. The result is called the variance (2), which is the standard deviation
squared.
5. Take the square root of the variance to get the standard deviation.
where:
pi = probability of outcome
ri = return of value of outcome
n = number of possible outcomes
Exercise: Using the data of ABC Products, Inc. and PENELCO above. Compute the
standard deviation.
QUIZ NO. 2
1. The following projections are available for three alternative investments in equity
stocks.
Probability of
Rate of Return if State Occurs
State of
State of
Stock A
StockB
Stock C
Economy
Economy
Boom
.40
10%
15%
20%
Recession
.60
8%
4%
0%
Required:
1. What would be the expected return on a portfolio with equal amounts invested
in each of the three stocks? (Portfolio 1)
2. What would be the expected return if half of the portfolio were in A, with the
remainder equally divided between B and C? (Portfolio 2)
3. Compute for the Standard Deviation using expected Portfolio 1 and Portfolio 2.
QUIZ NO. 1
A dealer in luxury yachts may order 0, 1, or 2 yachts for this seasons inventory. The cost
of carrying each excess yacht is P50,000, and the gain for each yacht sold is Php
200,000.
a. Compute for the expected value of each decision.
b. What is the expected value with perfect information?
c. What is the expected value of perfect information?
QUIZ NO. 1
A dealer in luxury yachts may order 0, 1, or 2 yachts for this seasons inventory. The cost
of carrying each excess yacht is P50,000, and the gain for each yacht sold is Php
200,000.
a. Compute for the expected value of each decision.
b. What is the expected value with perfect information?
c. What is the expected value of perfect information?
QUIZ NO. 1
A dealer in luxury yachts may order 0, 1, or 2 yachts for this seasons inventory. The cost
of carrying each excess yacht is P50,000, and the gain for each yacht sold is Php
200,000.
a. Compute for the expected value of each decision.
b. What is the expected value with perfect information?
c. What is the expected value of perfect information?
QUIZ NO. 1
A dealer in luxury yachts may order 0, 1, or 2 yachts for this seasons inventory. The cost
of carrying each excess yacht is P50,000, and the gain for each yacht sold is Php
200,000.
a. Compute for the expected value of each decision.
b. What is the expected value with perfect information?
c. What is the expected value of perfect information?
QUIZ NO. 1
A dealer in luxury yachts may order 0, 1, or 2 yachts for this seasons inventory. The cost
of carrying each excess yacht is P50,000, and the gain for each yacht sold is Php
200,000.
a. Compute for the expected value of each decision.
b. What is the expected value with perfect information?
c. What is the expected value of perfect information?
QUIZ NO. 1
A dealer in luxury yachts may order 0, 1, or 2 yachts for this seasons inventory. The cost
of carrying each excess yacht is P50,000, and the gain for each yacht sold is Php
200,000.
a. Compute for the expected value of each decision.
b. What is the expected value with perfect information?
c. What is the expected value of perfect information?
QUIZ NO. 1
A dealer in luxury yachts may order 0, 1, or 2 yachts for this seasons inventory. The cost
of carrying each excess yacht is P50,000, and the gain for each yacht sold is Php
200,000.
a. Compute for the expected value of each decision.
b. What is the expected value with perfect information?
c. What is the expected value of perfect information?