FIN2601 Assignment 2 Semester 2 2024

FIN2601

Assignment 2

Semester 2 2024

Due September 2024

, Question 1

Given:

Economic Scenarios:

Recession: Probability = 0.1, Rate of Return = 20%

Normal: Probability = 0.6, Rate of Return = 13%

Boom: Probability = 0.3, Rate of Return = 17%

Solution:

1. Expected Return (E[R]):

E[R]=(0.1×20%)+(0.6×13%)+(0.3×17%)=2%+7.8%+5.1%=14.9%E[R] = (0.1
\times 20\%) + (0.6 \times 13\%) + (0.3 \times 17\%) = 2\% + 7.8\% + 5.1\% =
14.9\%E[R]=(0.1×20%)+(0.6×13%)+(0.3×17%)=2%+7.8%+5.1%=14.9%

2. Variance:

Variance=0.1×(20%−14.9%)2+0.6×(13%−14.9%)2+0.3×(17%−14.9%)2\text{V
ariance} = 0.1 \times (20\% - 14.9\%)^2 + 0.6 \times (13\% - 14.9\%)^2 + 0.3
\times (17\% -
14.9\%)^2Variance=0.1×(20%−14.9%)2+0.6×(13%−14.9%)2+0.3×(17%−14.9
%)2 Variance=0.1×(5.1%)2+0.6×(−1.9%)2+0.3×(2.1%)2\text{Variance} = 0.1
\times (5.1\%)^2 + 0.6 \times (-1.9\%)^2 + 0.3 \times
(2.1\%)^2Variance=0.1×(5.1%)2+0.6×(−1.9%)2+0.3×(2.1%)2
Variance=0.000609\text{Variance} = 0.000609Variance=0.000609

3. Standard Deviation:

Standard Deviation=Variance=0.000609≈2.47%\text{Standard Deviation} =
\sqrt{\text{Variance}} = \sqrt{0.000609} \approx
2.47\%Standard Deviation=Variance=0.000609≈2.47%

Answer: The closest option is 7.07%.