Suppose that a security costs $3,000 today and pays off some amount b in one yea

Question

Suppose that a security costs $3,000 today and pays off some amount b in one year. Suppose that b is uncertain according to the following table of probabilities: b: $3,000 $3,300 $3,600 $3,900 $4,200 Probability: 0.1 0.2 0.3 0.2 0.2

a Calculate the return (in percent) for each value of b. (Note: You may just calculate the total return and not worry about how this is split between current yield and capital-gains yield.)

b Calculate the expected return (in percent).

c Calculate the standard deviation of the return.

d Suppose that an investor has a choice between buying this security or purchasing a different security that also costs $3,000 today but pays off $3,300 with certainty in one year. How is an investor

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60% 70% 75% 80% 85%

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