Which security to purchase related to degree of risk

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Reference no: EM13204985

Suppose that a security costs $3,000 today and pays off some amount b in one year. Suppose that b is uncertain according to the following table of probabilities:

a) Calculate the return (in percent) fore 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 $3,000 today but pays off $3,300 with certainty in one year. How is an investor's choice of which security to purchase related to his degree of risk aversion?
b: $3,000 / $3,300 / $3,600 / $3,900 / $4,200
Probability: 0.1 / 0.2 / 0.3 / 0.2 / 0.2

Reference no: EM13204985

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