Compute the Expected Return, Standard Deviation, and Value at Risk

question 47

Essay

Compute the expected return, standard deviation, and value at risk for each of the following investments:
Investment (A): Pays $800 three-fourths of the time and a $1200 loss otherwise.
Investment (B): Pays $1000 loss half of the time and a $1600 gain otherwise.
State which investment will be preferred by each of the following investors, and briefly explain why.
(i) a risk-neutral investor.
(ii) an investor who seeks to avoid the worst-case scenario.
(iii) a risk-averse investor.

---

Definitions:

Payback Period

The time it takes for an investment to generate an amount of income or cash equal to the cost of the investment.

Depreciation

Depreciation is the method of allocating the cost of a tangible or physical asset over its useful life.

Salvage Value

An asset's forecasted residual value once it has fulfilled its period of usefulness.

Sales

The total amount of revenue generated from the sale of goods or services by a company.