MID TEST FOR BILINGUAL CLASS

1. Assume that you are considering selecting assets from among the following
four candidates:
Market
Condition
Good
Average
Poor
Market
Condition
Good
Average
Poor
Assume that

Asset 1
Return
16
12
8
Asset 3
Return

Probability
0.25
0.5
0.25

Market
Condition
Good
Average
Poor

Assets 2
Return

Probability

4
6
8

0.25
0.5
0.25

Assets 4
Market
Return
Condition
20
0.25
Good
16
14
0.5
Average
12
8
0.25
Poor
8
there is no relationship for each investment (Assets)
Probability

Probability
1/3
1/3
1/3

a. Solve for the expected return and standard deviation of return for each
separated investment.
b. Make 6 portfolios for 2 combination assets with the same portions invested in
each asset (50%) and solve for expected return portfolio and variance of each
of the portfolios
2. Assume that you are considering selecting investment for 2 projects A and B
with the same economic years (3 years) and Initial outlay (2000). Interest
rate for each project is 20%. Probability distribution and cash flows for both
project are:
Year
1

A Project
Cash flow
800
900
1200
1400
900
1000
1300
1500
1000
1200
1500
1600

Probability
0.20
0.30
0.40
0.10
0.15
0.25
0.30
0.30
0.20
0.25
0.30
0.25

year
1

B Project
Cash flow
1000
1200
1300
1400
1100
1300
1400
1500
1200
1300
1500
1600

Probability
0.1
0.3
0.2
0.4
0.1
0.25
0.4
0.25
0.2
0.2
0.35
0.25

Question:
a. Solve for the Expected Net Present Value and standard deviation of each
project

b. Where is the more feasible value between A and B