Question 1

Suppose that there are two stocks, Stock A and Stock B. The prices of the stocks are both $20 per share. The prices of both stocks would increase to $40 with 60 percent probability, or decrease to $10 with 40 percent probability. You are to invest $40 to buy these stocks. Explain your investment strategy.

Question 2

Suppose that Ms. Lynch can make up her portfolio using a risk-free asset that offers a surefire rate of return of 10% and a risky asset with an expected rate of return of 15%, with standard deviation 5. If she chooses a portfolio with an expected rate of return of 12.50%, what is the standard deviation of her return on this portfolio?

Question 3

Suppose that over 50% of the adult population of Canada taking prescription drugs on a regular basis. For adults age 65 and older, 82% take prescription drugs regularly. For adults age 18 to 64, 49% take prescription drugs regularly. The 18-64 age group accounts for 83.5% of the adult population.

a. What is the probability that a randomly selected adult is 65 or older?

b. Given an adult takes prescription drugs regularly, what is the probability that the adult is 65 or older?