Problem: (Expected return and risk) General Eclectic Corporation is considering three possible capital investment projects. The projected returns depend on the future state of the economy as given here.
a. Calculate each project's expected return, variance, and standard deviation.
b. Rank the projects on the basis of (1) expected return and (2) risk. Which project would you choose?
PROJECTED RETURN
State of the Probability of
Economy Occurrence 1 2 3
Recession 0.20 10% 8% 12%
Stable 0.60 15 13 10
Boom 0.20 21 25 8