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Problem - Expected Rate of Return and Risk Measures - A venture investor, BKAngel, is considering investing in a software venture opportunity. However, the rate of return to be realized next year is likely to vary with the economic climate that actually occurs. Following are three possible economic outcomes, the probability that each one will occur, and the rate of return projected for each outcome:
ECONOMIC CLIMATE
PROBABILITY OF OCCURRENCE
RATE OF RETURN
Recession
0.25
-20.0%
Normal
0.50
15.0%
Rapid growth
30.0%
Required -
A. What is the expected rate of return on the software venture?
B. Calculate the variance and standard deviation of the rates of return for the software venture.
C. Calculate the coefficient of variation of the rates of return for the software venture. If the coefficient of variation of the rates of return for BKAngel's prior venture investments is 1.5, would the software venture be considered as being less or more risky?
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