Project #42479 - Evaluating Risk

Introduction

The intent of this assignment is to demonstrate that you can evaluate the riskiness of a stock using statistical analysis. An important consideration in investing is not only the expected return, but the likelihood that you would receive that return. There is a trade-off between risk and return. In order to receive a higher return, you have to bear more risk. The risk can be evaluated by calculating the standard deviation and coefficient of a variation of the stock.

Instructions

Use the blank table below to help you determine the standard deviation for the following stocks.

  • Stock A will return a rate of 12% in a recession, 15% in normal conditions and 18% during a boom.  The expected return is 15%. 
  • Stock B will return a rate of 7% in a recession, 15% in normal conditions and 23% during a boom.  The expected return is 15%.

Additionally, use the standard deviation to determine the Coefficient of Variation. Finally, list the Range.

Scenario

Rate of Return

Expected Return

Deviation from Expected Return

Squared Deviation

Probability

Squared Deviation x Probability

 

(1)

(2)

(3) = (2) - (1)

(4) = (3) x (3)

(5)

(4) x (5)

Recession

 

 

 

 

0.25

 

Normal

 

 

 

 

0.5

 

Boom

 

 

 

 

0.25

 

           

 

Standard Deviation =

 

 

CV =

 

 

Range =

 

Subject Business
Due By (Pacific Time) 10/10/2014 12:00 am
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