Risk and Rates of Return: Stand-Alone Risk

Stand-alone risk is the risk an investor would face if he or she held only . No investment should be undertaken unless its expected rate of return is high enough to compensate for its perceived . The expected rate of return is the return expected to be realized from an investment; it is calculated as the of the probability distribution of possible results as shown below:

The an asset's probability distribution, the lower its risk. Two useful measures of stand-alone risk are standard deviation and coefficient of variation. Standard deviation is a statistical measure of the variability of a set of observations as shown below:

If you have a sample of actual historical data, then the standard deviation calculation would be changed as follows:

The coefficient of variation is a better measure of stand-alone risk than standard deviation because it is a standardized measure of risk per unit; it is calculated as the divided by the expected return. The coefficient of variation shows the risk per unit of return, so it provides a more meaningful risk measure when the expected returns on two alternatives are not .

Quantitative Problem: You are given the following probability distribution for CHC Enterprises:

What is the stock's expected return? Round your answer to 2 decimal places. Do not round intermediate calculations. _______%

What is the stock's standard deviation? Round your answer to two decimal places. Do not round intermediate calculations. _______%

What is the stock's coefficient of variation? Round your answer to two decimal places. Do not round intermediate calculations. _______

-Select- one portfolio one asset multiple assets Select risk cost return -Select combined sum standard deviation weighted average of return-f = Pr1 + Pr2 + + P TN = Pri 2T2 + i=1 Select wider tighter broader (n-r)P Standard deviation Estimated - N-1 Select correlation coefficient risk premium standard deviation -Select identical correlated State of Probability Rate of return Economy Strong Normal Weak 0.25 0.45 0.3 19% 9% -4%