(a) Which investment type would you choose if you wanted to maxi accumulate value after 3 years ? Justify your choice and provide details of (b) Which investment type would you choose if you wanted to m after 3 years? Assume that risk is measured as the variance of your ac Justify your choice and provide details of your calculations.
(a) Which investment type would you choose if you wanted to maxi accumulate value after 3 years ? Justify your choice and provide details of (b) Which investment type would you choose if you wanted to m after 3 years? Assume that risk is measured as the variance of your ac Justify your choice and provide details of your calculations.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
![Let R be a random variable taking three possible values: 7% with probability 0.4, 5% with
probability 0.25, -2% with probability 0.35.
Consider a 3-year investment, where you invest £10 at the start for the first year and £5 at the
start of the second year and £10 at the start of the third year. You can choose between two
types of investments, type A and type B. In type A the annual effective rates for years 1, 2 and
3 are assumed to be independent and identically distributed random variables {R}k=1,2,3 with
distribution given by the r.v. R as described above. In type B the annual effective rates for
the three years are the same rate, which is assumed to be a uniform random variable à on the
interval [-3%, 5%].
(a)
Which investment type would you choose if you wanted to maximise the expected
accumulate value after 3 years ? Justify your choice and provide details of your calculations.
(b)
Which investment type would you choose if you wanted to minimise your risk
after 3 years? Assume that risk is measured as the variance of your accumulated value.
Justify your choice and provide details of your calculations.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F69cce4ac-4bf6-4e6b-8636-bf160e045b58%2F4e13cb01-1664-431b-b087-8a19f3af9ede%2Fkllh8pi_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Let R be a random variable taking three possible values: 7% with probability 0.4, 5% with
probability 0.25, -2% with probability 0.35.
Consider a 3-year investment, where you invest £10 at the start for the first year and £5 at the
start of the second year and £10 at the start of the third year. You can choose between two
types of investments, type A and type B. In type A the annual effective rates for years 1, 2 and
3 are assumed to be independent and identically distributed random variables {R}k=1,2,3 with
distribution given by the r.v. R as described above. In type B the annual effective rates for
the three years are the same rate, which is assumed to be a uniform random variable à on the
interval [-3%, 5%].
(a)
Which investment type would you choose if you wanted to maximise the expected
accumulate value after 3 years ? Justify your choice and provide details of your calculations.
(b)
Which investment type would you choose if you wanted to minimise your risk
after 3 years? Assume that risk is measured as the variance of your accumulated value.
Justify your choice and provide details of your calculations.
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