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Suppose your friend, Ben, uses 1,000 RMB from his savings to set up a company. His company's income is also uncertain. In a good year,
Suppose your friend, Ben, uses 1,000 RMB from his savings to set up a company. His company's income is also uncertain. In a good year, it will generate 101 RMB of income and in a bad year, it will generate only 17 RMB of income. A good year occurs with probability 60% and a bad year 40%. Suppose the risk free rate is 2%. To measure the risk-adjusted return of equity, we can use the formula below to compute the Ratio of the risk premium to the standard deviation of the returns: Ratio = (Expected Return on Equity - Risk Free Rate)/Standard Deviation of Return on Equity = - 2. What is this Ratio in this example? Please round the answer to 2 decimal points. For example if your answer is 1.25, then type 1.25 in the answer box
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