How much you have after a year

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Reference no: EM132001782

Suppose you have $1,000 and you have to make a decision to set the portfolio which is consist of two possible options, one is the Cetificate of Deposit (CD) and the other is a bond. CD pays interest rate, r = 5 (%), while a bond for a year that would also pay r = 5 (%) interest rate (coupon value) as well; however there is a probability p = 0.6 that the value of bond may increase by g = $50 (capital gains) and the probability (1-p) = 0.4 of l = $40 (capital loss).

1. Suppose you put $500 into the CD and $500 into a bond. How much you have after a year?

2. (Mean Value Analysis) What is the µ(the mean of the probability distribution) in this problem?

3. (Mean Value Analysis) What is the s (the variance of the probability distribution) in this problem?

4. µ = a +ß s. Find a value of a and ß and draw a graph where x-axis is s and y-axis is µ.

Reference no: EM132001782

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