Risk and Rates of Return: Stand-Alone Risk

Stand-alone risk is the risk an investor would face if he or she held only -Select-one portfolioone assetmultiple assetsCorrect 1 of Item 1. No investment should be undertaken unless its expected rate of return is high enough to compensate for its perceived -Select-riskcostreturnCorrect 2 of Item 1. The expected rate of return is the return expected to be realized from an investment; it is calculated as the -Select-combined sumstandard deviationweighted averageCorrect 3 of Item 1 of the probability distribution of possible results as shown below:

The -Select-widertighterbroaderCorrect 4 of Item 1 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 -Select-correlation coefficientrisk premiumstandard deviationCorrect 5 of Item 1 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 -Select-identicaldifferentcorrelatedCorrect 6 of Item 1.

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

State of Economy	Probability	Rate of return
Strong	0.2	19%
Normal	0.45	9%
Weak	0.35	-4%

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.