Risk and Rates of Return: Stand-Alone Risk
Stand-alone risk is the risk an investor would face if he or she held only -Select-one portfolio one asset multiple assets Correct 1 of Item 1. No investment should be undertaken unless its expected rate of return is high enough to compensate for its perceived -Select-risk cost return Correct 2 of Item 1. The expected rate of return is the return expected to be realized from an investment; it is calculated as the -Select-combined sumstandard deviation weighted average Correct 3 of Item 1 of the probability distribution of possible results as shown below:
The -Select-widertighter broader Correct 4 of Item 1 an asset's probability distribution, the lower its risk.
The coefficient of variation is a better measure of stand-alone risk than standard deviation because it is a standardized measure of risk per unit; it is calculated as the -Select-correlation coefficient risk premium standard deviation Correct 5 of Item 1 divided by the expected return. The coefficient of variation shows the risk per unit of return, so it provides a more meaningful risk measure when the expected returns on two alternatives are not -Select-identical different correlated Correct 6 of Item 1.
Quantitative Problem: You are given the following probability distribution for CHC Enterprises:
State of Economy Probability Rate of return
Strong 0.25 20%
Normal 0.45 8%
Weak 0.3 -4%
What is the stock's expected return? Round your answer to 2 decimal places. Do not round intermediate calculations. %
What is the stock's standard deviation? Round your answer to two decimal places. Do not round intermediate calculations. %
What is the stock's coefficient of variation? Round your answer to two decimal places. Do not round intermediate calculations.