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Economics

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:

b: $3,000 $3,300 $3,600 $3,900 $4,200
Probability: 0.1 0.2 0.3 0.2 0.2

a. find out the return (in percent) for each value of b. (Note: You may just find out the total return and not worry about how this is split between current yield and capital-gains yield.)

b. find out the expected return (in percent).

c. find out 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?

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Microeconomics, Economics

Category:- Microeconomics
Reference No.:- M950797

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