Using the following information for McDonovan, Inc.'s stock, calculate their expected return and standard deviation.

Using the following information for McDonovan, Inc.'s stock, calculate their expected return and standard deviation.

        State                               Probability                  Return

        Boom                             20%                               40%

        Normal                         60%                               15%

        Recession                     20%                               (20%)

Answer: 

Ki =     = (.20)(40%) + (.60)(15%) + (.20)(-20%)

                                = 8% + 9% - 4% = 13%

σi =    ().

σi =    ((40% - 13%)2(.2) + (15% - 13%)2 (.6) + (-20% - 13%)2 (.2)). = 19.13%

The cash return on an investment is calculated as purchase price-selling price.

Answer:  FALSE

Because returns are more certain for the least risky investments, the required return on these investments should be higher than the required returns on more risky investments.

Answer:  FALSE

Even though an investor expects a positive rate of return, it is possible that the actual return will be negative.

Answer:  TRUE

The expected rate of return is the weighted average of the possible returns for an investment.

Answer:  TRUE

The expected rate of return is the sum of each possible return times it likelihood of occurrence.

Answer:  TRUE

The higher the standard deviation, the less risk the investment has.

Answer:  FALSE