An investor has $1000 available for a 1-year investment. The investor is considering the following three options: Option A Possible return 30%, 20%, 0%, -20% Probability 25%, 40%, 20%, 15% Option B Possible return 50%, 30%, 0%, -40% Probability 15%, 50% ,20% ,15% Option C Guaranteed return 10% Probability 100% i. Based on the expected returns, which of these options should the investor choose? ii. Compute the standard deviations for Option A and Option B. Which one of options A, B, and C has the least risk (i.e. the smallest standard deviation), which one has the highest risk? What can you say about the relationship between the expected returns and the risks of financial assets in the normal situation?
An investor has $1000 available for a 1-year investment. The investor is considering the following three options:
Option A
Possible return 30%, 20%, 0%, -20%
Probability 25%, 40%, 20%, 15%
Option B
Possible return 50%, 30%, 0%, -40%
Probability 15%, 50% ,20% ,15%
Option C
Guaranteed return 10%
Probability 100%
i. Based on the expected returns, which of these options should the investor choose?
ii. Compute the standard deviations for Option A and Option B.
Which one of options A, B, and C has the least risk (i.e. the smallest standard deviation), which one has the highest risk? What can you say about the relationship between the expected returns and the risks of financial assets in the normal situation?
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