eston3 24-28 Joan Summers has $100, 000 to invest. She can buy a risk free asset

Question

eston3 24-28 Joan Summers has $100, 000 to invest. She can buy a risk free asset that will pay 5% or she can invest in a stock that has a 0.4 chance of paying 15%, a 0.3 chance of paying 18%, and a 0.3 chance of providing a 6% return. 24. Determine the expected percentage return on the stock. 25. Determine the standard deviation of the percentage return on the stock. Suppose that her marginal utility of portfolio risk is MUap return on portfolio is MUopp 4,and her marginal utility of 27. Determine the optimal level of portfolio risk for Joan. 28. Determine the fraction of the wealth that she invests on stock (*) Sketch a diagram associated with Joan's investment decision. On the diagram show the optimal level of return on portfolio and portfolio risk which Joan chooses based on her preference and taste toward risk.

Explanation / Answer

Question 24). Solution :- Expected return on stock = 0.4 * 15 % + 0.3 * 18 % + 0.3 * 6 %

= 6 % + 5.40 % + 1.80 %

= 13.20 %

Conclusion :- Expected return on stock = 13.20 %.

Question 25). Solution :- Calculation of standard deviation of the return on stock :-

= [ 0.4 * (15 % - 13.20 %)2 + 0.3 * (18 % - 13.20 %)2 + 0.3 * ( 6 % - 13.20 %)2 ]1/2

= [ 0.4 * 3.24 + 0.3 * 23.04 + 0.3 * 51.84 ] 1/2

= (1.296 % + 6.912 % + 15.552 %)1/2

= (23.76)1/2

= 4.87 % (approx).

Conclusion :- Standard deviation of the percentage return on stock = 4.87 % (approx).

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.