FIN $310$

Chapter $8$ Midterm

Note: Please put your answers only in the section below the Bold Red sentence at the end of the Required section below.

Investors have made the following forecast about the returns from investing in securities issued by two companies:

State of the Economy Probability of this state of the economy Rate of return from Company X Rate of return from Company Z

Boom $5\%25\%50\%$

Good times $20\%20\%30\%$

Average times $50\%15\%20\%$

Bad times $15\%5\%-5\%$

Recession $10\%0\%-25\%$

Required:

A$.$ Calculate the expected return of each distribution.

B$.$ Calculate the standard deviation of each distribution.

C$.$ In terms of total risk, which security is safer?

Your answers to this problem should be placed in the space below this line.

A Company X

Probability Return Product

$0\mathrm{.}05$

$0\mathrm{.}2$

$0\mathrm{.}5$

$0\mathrm{.}15$

$0\mathrm{.}1$

Expected return

Company Z

Probability Return Product

$0\mathrm{.}05$

$0\mathrm{.}2$

$0\mathrm{.}5$

$0\mathrm{.}15$

$0\mathrm{.}1$

Expected return

B Calculations of Standard Deviation

Company X

Deviation

Squared Product

Probability Return Deviation

$0\mathrm{.}05$

$0\mathrm{.}2$

$0\mathrm{.}5$

$0\mathrm{.}15$

$0\mathrm{.}1$

Variance

Standard deviation

Company Z

Deviation

Squared Product

Probability Return Deviation

$0\mathrm{.}05$

$0\mathrm{.}2$

$0\mathrm{.}5$

$0\mathrm{.}15$

$0\mathrm{.}1$

Variance

Standard deviation

C Company X is safer.