FIN2601 Assignment 2 COMPLETE ANSWERS) Semester 2 2024

FIN2601 Assignment 2
COMPLETE ANSWERS)
Semester 2 2024
100% GUARANTEED

, FIN2601 Assignment 2 COMPLETE ANSWERS) Semester
2 2024
Question 1 Complete Mark 1.00 out of 1.00 QUIZ The
financial manager of Summer Financial Group is tasked
with evaluating the standard deviation of a proposed
investment project. This analysis aims to provide insights
into the potential risk associated with the project's
expected returns, which are linked to the future
performance of the economy over a specific period as
follows: Economic scenario Probability of occurrence Rate
of return Recession 0,1 20% Normal 0,6 13% Boom 0,3
17% What is the standard deviation of the proposed
investment project? 1. 7,07% 2. 10,45% 3. 15,81% 4.
18,67% −
To calculate the standard deviation of the proposed investment project, follow these steps:

Step 1: Calculate the Expected Rate of Return (Mean)

The formula is: Expected Return(μ)=∑(Probability×Rate of Return)\text{Expected Return} (\
mu) = \sum (\text{Probability} \times \text{Rate of
Return})Expected Return(μ)=∑(Probability×Rate of Return)

Given:

 Recession: Probability = 0.1, Return = 20%
 Normal: Probability = 0.6, Return = 13%
 Boom: Probability = 0.3, Return = 17%

The expected return is:

μ=(0.1×20%)+(0.6×13%)+(0.3×17%)\mu = (0.1 \times 20\%) + (0.6 \times 13\%) + (0.3 \times
17\%)μ=(0.1×20%)+(0.6×13%)+(0.3×17%) μ=2%+7.8%+5.1%=14.9%\mu = 2\% + 7.8\% +
5.1\% = 14.9\%μ=2%+7.8%+5.1%=14.9%

Step 2: Calculate Each Scenario's Variance Contribution

For each scenario: