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Economics 3223 Homework 5 2 pages of homework 1 page of formulas Due Friday, October 9, 2009 1. Consider the following possible rates of return (and their related probabilities of occurrences) on a 5-year Treasury bond. These probabilities have been derived from the numbers of times these rates have occurred during the past 10 years compared to the other reported rates. Probability of Occurrence
Poss ible RET
0.1 0.3 0.1 0.3 0.2
6% 8% 25% 15% 35%
Using the above data, calculate the expected rate of return or the mean expected rate of return (RETe). Be sure to show your work for full credit! E [return] = (0.1 * 6) + (0.3 * 8) + (0.1 * 15) + (0.3 * 25) + (0.2 *35) = (.6) + (2.4) + (1.5) + (7.5) + (7) = 19% 2. Continue to use the data in question 1. Continue to show your work for full credit! a. Calculate the variance of returns of this sample of data. Investment 1 = 0.1(6% - 19%)2 = 16.9 Investment 2 = 0.3(8% - 19%)2 = 36.3 2 Investment 3 = 0.1(15% - 19%) = 1.6 Investment 4 = 0.3(25% - 19%)2 = 10.8 Investme...
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