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 46% chance for being fair, and a 35% 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 intermediate calculations to 4 decimal places and final answers to 2 decimal places.)

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 46% chance for being fair, and a 35% chance for being poor. Probability distributions of the returns for these markets are given in the accompanying table.

Explanation / Answer

a)

for Europe:

   Expected value =2.67%

std deviation =7.18%

for Asia:

expected value =1.50%

std deviation =13.30%

b)

from above ; Investment in Europe needs to be picked as an investment.

y p(y) yP(y) y2P(y) (y-)2 (y-)2P(y) good 10 0.1900 1.900 19.000 53.729 10.208 fair 7 0.4600 3.220 22.540 18.749 8.624 poor -7 0.3500 -2.450 17.150 93.509 32.728 total 1 = 2.67 58.690 165.987 2= 51.5611 std deviation=     =    2 = 7.1806

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