Suppose you visit with a financial adviser, and you are considering investing so
ID: 1217725 • Letter: S
Question
Suppose you visit with a financial adviser, and you are considering investing some of your wealth in one of three investment portfolios: stocks, bonds, or commodities. Your financial adviser provides you with the following table, which gives the probabilities of possible returns from each investment:
Stocks
Bonds
Commodities
Probability
Return
Probability
Return
Probability
Return
0.20.2
1515%
0.50.5
1212%
0.20.2
2020%
0.250.25
1010%
0.50.5
66%
0.250.25
1212%
0.250.25
88%
0.250.25
66%
0.30.3
55%
0.250.25
44%
0.050.05
00%
To maximize your expected return, you should choose:
A.
bonds.
B.
stocks.
C.
commodities.
D.
All of the portfolios have the same expected return.
Stocks
Bonds
Commodities
Probability
Return
Probability
Return
Probability
Return
0.20.2
1515%
0.50.5
1212%
0.20.2
2020%
0.250.25
1010%
0.50.5
66%
0.250.25
1212%
0.250.25
88%
0.250.25
66%
0.30.3
55%
0.250.25
44%
0.050.05
00%
Explanation / Answer
Commodities as expected return of 734.5 which is the highest.(c)
we can calculate expected return assum of all the individual (probabilityxreturn) ie for commodity it is
.2x2020+.25x1212+.25x66+.25x.44+.05x0
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