1. Leann, with a $300,000 bequest from her father and a business degree from Athabasca University,...
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1. Leann, with a $300,000 bequest from her father and a business degree from Athabasca University, is considering opening a gift shop in North Edmonton. If her shop is highly successful, she expects an annual net profit of $220,000. If the business is moderately successful, she expects $130,000. If not successful, she expects to have zero net profit. Under any circumstances, she is not contemplating any loss. Her anticipated probabilities of these three options are: 0.5, 0.3 and 0.2, respectively. a. Calculate her expected net profit. Also calculate the standard deviation of her profit. b. The business requires a $300,000 investment. If she has a 20% opportunity cost on invested funds of similar riskiness, should the project be undertaken? c. Suppose Leann considers two alternative investment options instead of opening a gift shop. She has the option to buy a risk free asset that will pay 10%, or she can invest in a stock that has a 0.3 chance of paying 10%, a 0.2 chance of paying 22%, and a 0.5 chance of providing a 20% return. If she invests $160,000 in the stock and $140,000 in the risk free asset, determine the expected percentage return on the stock and the standard deviation. 1. Leann, with a $300,000 bequest from her father and a business degree from Athabasca University, is considering opening a gift shop in North Edmonton. If her shop is highly successful, she expects an annual net profit of $220,000. If the business is moderately successful, she expects $130,000. If not successful, she expects to have zero net profit. Under any circumstances, she is not contemplating any loss. Her anticipated probabilities of these three options are: 0.5, 0.3 and 0.2, respectively. a. Calculate her expected net profit. Also calculate the standard deviation of her profit. b. The business requires a $300,000 investment. If she has a 20% opportunity cost on invested funds of similar riskiness, should the project be undertaken? c. Suppose Leann considers two alternative investment options instead of opening a gift shop. She has the option to buy a risk free asset that will pay 10%, or she can invest in a stock that has a 0.3 chance of paying 10%, a 0.2 chance of paying 22%, and a 0.5 chance of providing a 20% return. If she invests $160,000 in the stock and $140,000 in the risk free asset, determine the expected percentage return on the stock and the standard deviation.
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a To calculate the expected net profit we multiply each possible profit outcome by its corresponding probability and sum them up Expected net profit Probability of highly successful outcome Net profit ... View the full answer
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