QUESTION 4

You are given the following data about expected returns on a Bank security on the LUSE where different states of the economy have the same probability of occurrence:

State Return

Strong growth 7.5%

Normal growth 5.0%

Weak growth 1.5%

Recession -2.5%

Required:

Compute and fully interpret the following for the investment:

1. The Expected return for the security.

[5 Marks]

2. The volatility of the security returns using the standard deviation.

[6 Marks]

3. The Sharpe ratio of the banking security assuming a yield of 3.5% on a risk-free security.

[4 Marks]

4. Assuming you can only invest in one, which one of the two securities would you recommend to invest in and why?

[5 Marks]

Total 20 Marks