Suppose the risk-free interest rate is 3%, and the stock market will retum either + 25% or -21% each year, with each outcome equally likely. Compare the following two investment strategies: (1) invest for one year in the risk-free investment, and one year in the market, or (2) invest for both years in the market. a. Which strategy has the highest expected final payoff? b. Which strategy has the highest standard deviation for the final payof? c. Does holding stocks for a longer period decrease your risk? a. Which strategy has the highest expected final payof? The two possible outcomes for investment (1) aro % or %. (Enter the outcomes from largest to smallest and round to one decimal place.) The four possble outcomes for investment (2) are % or % or % or%. (Enter the outcomes from largest to amalost and round to one decimal place.) The expected return for investment (1) is. (Round to one decimal place.) The expected return for Investment (2) is%. (Round to one decimal place.) The strategy with the highest expected final payoff is (Select from the drop-down menu.) b. Which strategy has the highest standard deviation for the final payoft? The standard deviation for investment (1) is% (Round to one decimal place.) The standard deviation for investment (2) is%. (Round to one decimal place.) The investment with the highest volatity is (Select from the drop-down menu.) c. Does holding stocks for a longer period decrease your risk? The answer is (Select from the drop-down menu.)
Suppose the risk-free interest rate is 3%, and the stock market will retum either + 25% or -21% each year, with each outcome equally likely. Compare the following two investment strategies: (1) invest for one year in the risk-free investment, and one year in the market, or (2) invest for both years in the market. a. Which strategy has the highest expected final payoff? b. Which strategy has the highest standard deviation for the final payof? c. Does holding stocks for a longer period decrease your risk? a. Which strategy has the highest expected final payof? The two possible outcomes for investment (1) aro % or %. (Enter the outcomes from largest to smallest and round to one decimal place.) The four possble outcomes for investment (2) are % or % or % or%. (Enter the outcomes from largest to amalost and round to one decimal place.) The expected return for investment (1) is. (Round to one decimal place.) The expected return for Investment (2) is%. (Round to one decimal place.) The strategy with the highest expected final payoff is (Select from the drop-down menu.) b. Which strategy has the highest standard deviation for the final payoft? The standard deviation for investment (1) is% (Round to one decimal place.) The standard deviation for investment (2) is%. (Round to one decimal place.) The investment with the highest volatity is (Select from the drop-down menu.) c. Does holding stocks for a longer period decrease your risk? The answer is (Select from the drop-down menu.)
Chapter7: Uncertainty
Section: Chapter Questions
Problem 7.14P
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