Investment advisors recommend risk reduction through international diversificati

Question

Investment advisors recommend risk reduction through international diversification. International investing allows you to take advantage of the potential for growth in foreign economies, particularly in emerging markets. Janice Wong is considering investment in either Europe or Asia. She has studied these markets and believes that both markets will be influenced by the U.S. economy, which has a 19% chance for being good, a 59% chance for being fair, and a 22% chance for being poor. Probability distributions of the returns for these markets are given in the accompanying table.

Find the expected value and the standard deviation of returns in Europe and Asia.

(Round answers to 2 decimal places. It will be efficient to do your calculations in Excel.)

References

Investment advisors recommend risk reduction through international diversification. International investing allows you to take advantage of the potential for growth in foreign economies, particularly in emerging markets. Janice Wong is considering investment in either Europe or Asia. She has studied these markets and believes that both markets will be influenced by the U.S. economy, which has a 19% chance for being good, a 59% chance for being fair, and a 22% chance for being poor. Probability distributions of the returns for these markets are given in the accompanying table.

Explanation / Answer

for returns in Europe:

for return in Asia:

hennce:

a)

b)

Investment in Asia

x f(x) xP(x) x2P(x) 17 0.1900 3.230 54.910 5 0.5900 2.950 14.750 -5 0.2200 -1.100 5.500 total 5.080 75.160 E(x) == xP(x) = 5.0800 E(x2) = x2P(x) = 75.1600 Var(x)=2 = E(x2)-(E(x))2= 49.3536 std deviation=         = 2 = 7.0252

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