hw3section1q1

1. (4) Suppose you visit with a financial adviser, and you are considering investing some of your wealth in one of three investment portfolios: stocks, bonds, or commodities. Your financial adviser provides you with the following table, which gives the probabilities of possible returns from each investment: Stocks Bonds Commodities Probability Return Probability Return Probability Return 0.25 12% 0.6 10% 0.2 20% 0.25 10% 0.4 7.50% 0.25 12% 0.25 8% 0.25 6% 0.25 6% 0.25 4% 0.05 0% a. Which investment should you choose to maximize your expected return: stocks, bonds, or commodities? Show the expected return for each. b. If you are rnisk-averse and must choose between the stock and the bond investments, which should you choose? Why?