Consider the following two assets with probability of return = Pi and return = Ri. Calculate the expected return for each and the standard deviation. Which one carries the greatest risk? Why?
What will be an ideal response?
For asset A, the expected return = 0.4(12) + 0.5 (8.5) + 0.1(-2.0) = 8.85%
For asset B, the expected return = 0.2(11.5) + 0.5(10.0) + 0.3(0) = 7.30%
For asset A, the standard deviation is 3.98 =
For asset B, the standard deviation is 4.81 =
Since asset B has a higher standard deviation than asset A, its return has higher risk.
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