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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

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:

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]

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

[6 Marks]

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

[4 Marks]

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

[7 Marks]

Total 20 Marks

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