Reference no: EM132926417

Question - Penny Lane has invested a sum of £100 in each of ten different investment vehicles. At the end of one year she reviews the performance of her investments and finds that two of the investments have grown to £104 each, four of the investments have grown to £105 each, and another four investments have grown to £108 each.

(a) Calculate the mean rate of return earned on Penny's investment:

(i) As the simple average, found by adding up all the returns on the investments and dividing by the number of investments.

(ii) As the expected value, found by multiplying each possible outcome with the ex-post probability of its occurrence.

(b) To evaluate whether the average return earned was commensurate with the risk of the investment, Penny wants to estimate the latter. She has learnt from a textbook that, in finance, risk generally means variability of outcome - the greater the variability, the greater the risk.