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Calculate standard deviation of return on this investment

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Reference no: EM132823828

Question - You own a well-diversified portfolio. You are considering a small investment in a local start-up founded by a family member.

Your best guess is that the start-up has a 30% chance of succeeding-in which case the return is estimated to be 400%--and a 70% chance of failing, in which case you will lose your entire investment (i.e., the return will be -100%.).

The current risk-free rate is 2% per year, and the expected market risk premium is 6% per year.

Calculate the standard deviation of return on this investment.

Is this a valuable investment opportunity? Explain your answer and use calculations, where appropriate, to make your point.

Reference no: EM132823828

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