Question lv Consider the following example: \"Invest £1,000 of own money in a fu

Question

Question lv Consider the following example: "Invest £1,000 of own money in a fund. Choice between 2 funds, both expire after 1 year. In both cases, the average payout is £1,100 (-10%). Which do you choose? A. £200 with probability 10% and £1,200 with probability 90%. B. £920 with probability 40% and £1,220 with probability 60%". Calculate for both alternatives 1. Variance 2. semi-variance (target return is 0%)- 3. Probability of loss 4. Expected value of loss Which alternative would you choose if you perceive risk as 5. Variance* 6. Semi-variance (target return is 0%)- 7. Probability of loss 8. Expected value of loss?

Explanation / Answer

Solution

(1) Variance :

A : E(A2)-(E(A))2 = (40000(0.1)+(1200)2(0.9)) - (200(0.1)+1200(0.9))2 = (300)2

B : E(B2)-(E(B))2 = (9202(0.4)+12202(0.6)) - (920(0.4)+1220(0.6))2 = (218.76)2

Option B as less variance

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