QUESTION 4

You are given the following data about expected returns on a security on the LUSE where different states of the economy have the same probability of occurrence of 25%

State Return

Strong growth 9.0%

Normal growth 6.5%

Weak growth 2.5%

Recession -4.5%

Required:

Compute and fully interpret the following for the investment:

1. The Expected return for the security.

[3 Marks]

2. The volatility of the security returns using the semi deviation.

[6 Marks]

3. Evaluate the securitys performance assuming a benchmark target rate of 3.5%.

[4 Marks]

4. Explain the rationale behind the security performance evaluation method used in (c) above.

[7 Marks]

Total 20 Marks