Probabilities of occurrence and rates of return

Reference no: EM13973532

Risk and Required Return

Case:

Alliance Health System Physician Group Practice Acquisition

1. Scenario.

Alliance Health System is considering acquiring a 50-physician multispecialty group practice located in its primary service area and wants to understand its corporate (portfolio) risk by identifying the return distributions for each.

2. Deliverables.

a. Given the economic state probabilities and rates of return in Table 1 below for both the acquisition and Alliance as a whole, calculate the following:

(1) Expected return

(2) Standard deviation

(3) Coefficient of variation

b. Should Alliance acquire the practice (justify your answer)?

3. Project Information.

Table 1. Probabilities of Occurrence and Rates of Return

Economic Condition	Probability of Occurrence	Rate of Return
Economic Condition	Probability of Occurrence	Group Practice	Alliance
Very poor	0.10	-5.0%	-10.0%
Poor	0.15	5.0%	0.0%
Average	0.45	10.0%	10.0%
Good	0.25	15.0%	30.0%
Very good	0.05	25/0%	50.0%

Reference no: EM13973532

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