23 Jul HOW IS AN INVESTORS CHOICE OF WHICH SECURITY TO PURCHASE RELATED TO HIS DEGREE OF RISK AVERSION?
Suppose that a security costs $3000 today and pays off some amount b in one year. Suppose that b is Show more Suppose that a security costs $3000 today and pays off some amount b in one year. Suppose that b is uncertain according to the following table of probabilities: b: $3000 $3300 $3600 $3900 $4200 Probability: 0.1 0.2 0.3 0.2 0.2 A Calculate the return (in percent) for each value of b. (Note: You may just calculate the total return and not worry about how this is split between current yield and capital-gains yield.) B Calculate the expected return (in percent). C Calculate the standard deviation of the return. D Suppose that an investor has a choice between buying this security or purchasing a different security that also costs $3000 today but pays off $3300 with certainty in one year. How is an investors choice of which security to purchase related to his degree of risk aversion? Show less
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