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.)
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
E2
Transcribed Image Text: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 payoff?
c. Does holding stocks for a longer period decrease your risk?
a. Which strategy has the highest expected final payoff?
The two possible outcomes for investment (1) are % or %. (Enter the outcomes from largest to smallest and round to one decimal place.)
The four possible outcomes for investment (2) are % or % or % or%. (Enter the outcomes from largest to smallest 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 payoff?
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 volatility is
V. (Select from the drop-down menu.)
c. Does holding stocks for a longer period decrease your risk?
The answer is
V (Select from the drop-down menu.)
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education