The Brewing Company is considering a capital project with a one-year life and the following possible rates of returns

Question

The Brewing Company is considering a capital project with a one-year life and the following possible rates of returns which are dependent on the state of the economy. The estimated rates of return are shown in the table: Given these probabilities and possible rates of return, the standard deviation of returns on the capital project is _____%. (Fill in the blank with your calculation result of two decimal places). State of the Economy Probability of Each State Occurring Rates of Return if State Occurs Boom .40 24% Normal .40 10% Recession .20 -12% View CommentsFlag question

Help In Homework · Accepted Answer

Computation of Standard Deviation: State of Economy Probability Return Probability * Return Return - Expected Return (Return - Expected Return)^2 Probability *(Return-Expected return)^2 Boom 0.4 24% 9.60% 12.80% 0.016384 0.66% Normal 0.4 10% 4.00% -1.20% 0.000144 0.01% Bust 0.2 -12.00% -2.40% -23.20% 0.053824 1.08% Expected Return = 11.20% Variance = 1.74% Standard Deviation = 13.18% =1.74%^(1/2)

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The Brewing Company is considering a capital project with a one-year life and the following possible rates of returns which are dependent on the state of the economy

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Archived Solution

Computation of Standard Deviation:
State of Economy	Probability	Return	*Probability Return**	Return - Expected Return	(Return - Expected Return)^2	*Probability (Return-Expected return)^2**
Boom	0.4	24%	9.60%	12.80%	0.016384	0.66%
Normal	0.4	10%	4.00%	-1.20%	0.000144	0.01%
Bust	0.2	-12.00%	-2.40%	-23.20%	0.053824	1.08%
		Expected Return =	11.20%		Variance =	1.74%
					Standard Deviation =	13.18%	=1.74%^(1/2)