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Here are the estimated ROE distributions for Firms A, B, and C: Probability 0.1 0.2 0.4 0.2 0.1 Firm A: 0.0% 5.0% 10.0% 15.0% 20.0%
Here are the estimated ROE distributions for Firms A, B, and C:
| Probability | |||||
|---|---|---|---|---|---|
| 0.1 | 0.2 | 0.4 | 0.2 | 0.1 | |
| Firm A: | 0.0% | 5.0% | 10.0% | 15.0% | 20.0% |
| Firm B: | (2.0) | 5.0 | 12.0 | 19.0 | 26.0 |
| Firm C: | (5.0) | 5.0 | 15.0 | 25.0 | 35.0 |
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Calculate the expected value and standard deviation for Firm C's ROE. , ; , .
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Discuss the relative riskiness of the three firms' returns. (Assume that these distributions are expected to remain constant over time.)
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Now suppose that all three firms have the same standard deviation of basic earning power (EBIT/Total assets), . What can we tell about the financial risk of each firm?
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