Question

A firm's required return is 10% on a 3 year project that it is evaluating. The first year return is forecast at Rs 2,40,000 with a standard deviation of Rs. 20000 ; second year return is forecast at Rs3,00,000 with a standard deviation of Rs. 30000 and the third year return is forecast at Rs 3, 60000 with a standard deviation of Rs. 40,000 . The riskless return is 7%. What is the overall standard deviation if the cash flows are independent and if they are perfectly correlated?

Answer 1

The overall standard deviation of the independent cash flows that are perfectly correlated is $90,000.

What is the standard deviation?

The standard deviation is the average variability of a data set.

The standard deviation describes an average value from which each data variable lies from the mean.

It is simply the average distance from the mean.

How can this overall standard deviation be calculated?

The standard deviation for this solution is computed as follows:

Year 1 standard deviation =  $20,000

Year 2 standard deviation = $30,000

Year 3 standard deviation = $40,000

Total standard deviation =   $90,000 ($20,000 + $30,000 + $40,000)

Thus, the overall standard deviation of the independent cash flows that are perfectly correlated is $90,000.

Learn more about standard deviation at https://brainly.com/question/475676

#SPJ1