K-mart is considering the purchase of one of two security cameras - V or Z. Both should

provide benefits over a 10-year period, and each requires an initial investment of $4000.

Management has constructed the following table of estimates of probabilities and rates of

return for pessimistic, most likely and optimistic results:

Camera 1 Camera 2

Amount Probability Amount Probability

Initial Investment $4000 1.00 $4000 1.00

Annual rate of

return

Pessimistic 20% 0.25 15% 0.20

Most likely 25% 0.50 25% 0.55

Optimistic 30% 0.25 35% 0.25

a) Determine the range for the rate of return for each of the two cameras.

b) Determine the expected rate of return for each camera. Which camera is more risky?

Why? (1 X 1 = 2 Marks)

3

c) You have been given the following return data on three (3) assets - A, B and C over the

period 2011-2014

Expected return %

Year Asset A Asset B Asset C

2011 16 17 14

2012 17 16 15

2013 18 15 16

2014 19 14 17

Using these assets, you have isolated three investment alternatives:

Alternative Investment

1 100% of asset A

2 50% of asset A and 50% of asset B

3 50% of asset A and 50% of asset C

a) Calculate the expected return over the four-year period for each of the three

alternatives.

b) Calculate the standard deviation of returns over the four-year for each of the three

alternatives.

c) Use your findings in parts a and b to calculate the coefficient of variation for each of

the three alternatives. Based on your findings above, which of the three investment

alternatives would you recommend? Why?