Vlad is a new investor and has been closely watching a company by the name of RUS
Question:
Vlad is a new investor and has been closely watching a company by the name of RUS Ltd., a pharmaceutical company aiming to develop a coronavirus vaccine.
Vlad believes the following returns are possible in 2022 and has attached a probability to each potential outcome:
Probability | Possible Return |
.20 | 230.00% |
.30 | 100.00% |
.30 | 5.00% |
.20 | -100.00% |
Calculate the Expected Return for RUS Ltd. in 2022.
Calculate the Risk (Standard Deviation) for RUS Ltd. in 2022.
Vlad hired an experienced stock analyst, who advised Vlad that based on his advanced modelling, the expected return and standard deviation for RUS Ltd are at 8.10% and 48.75%, respectively. Using these new variables, detail the range of returns expected by investing in RUS Ltd. at the 68% (one standard deviation) and 95% (two standard deviations) confidence levels.
Vlad is considering investing all his savings in buying shares in RUS Ltd.
Explain to Vlad why he should not do this by referring to the risk/return trade-off and what action Vlad can take to reduce some of the risk.
Do you consider RUS Ltd. to be a volatile and risky investment? Why or why not? Calculate the Coefficient of Variation (CV) as part of your response.
Data Modeling and Database Design
ISBN: 978-1285085258
2nd edition
Authors: Narayan S. Umanath, Richard W. Scammel