Your client has estimated the potential returns that may be achieved from a project, together with...

 

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Your client has estimated the potential returns that may be achieved from a project, together with the likelihood of such returns occurring, detailed in the table below: Possible Returns Probability of Occurrence 10% 20% -37% 0% 16% 32% 55% 15% The project has an estimated the risk of this project, measured with Beta, of 1.3 which has been externally verified. The market portfolio, measured as the ASX 200, has returned an average of 8.5% per annum over the past 10 years. The current risk-free rate is 2%. Calculate the standard deviation of this project and comment on this return relative to the market's standard deviation of 10.2% p.a. Additionally, given the above information, identify whether it is a good idea, for Short Stop, to invest in this company. Explain your reasoning for your decision. (14 marks) Your client has estimated the potential returns that may be achieved from a project, together with the likelihood of such returns occurring, detailed in the table below: Possible Returns Probability of Occurrence 10% 20% -37% 0% 16% 32% 55% 15% The project has an estimated the risk of this project, measured with Beta, of 1.3 which has been externally verified. The market portfolio, measured as the ASX 200, has returned an average of 8.5% per annum over the past 10 years. The current risk-free rate is 2%. Calculate the standard deviation of this project and comment on this return relative to the market's standard deviation of 10.2% p.a. Additionally, given the above information, identify whether it is a good idea, for Short Stop, to invest in this company. Explain your reasoning for your decision. (14 marks)

Answer rating: 100% (QA)

To calculate the standard deviation of the project we need to use the formula for the weighted standard deviation The formula is as follows Pi Ri Ravg... View the full answer