Market observers are quite uncertain whether the stock market has bottomed out f
ID: 1189642 • Letter: M
Question
Market observers are quite uncertain whether the stock market has bottomed out from the economic meltdown that began in 2008. In an interview on March 8, 2009, CNBC interviewed two prominent economists who offered differing views on whether the U.S. economy was getting stronger or weaker. An investor not wanting to miss out on possible investment opportunities considers investing $15,000 in the stock market. He believes that the probability is 0.20 that the market will improve, 0.47 that it will stay the same, and 0.33 that it will deteriorate. Further, if the economy improves, he expects his investment to grow to $19,000, but it can also go down to $9,000 if the economy deteriorates. If the economy stays the same, his investment will stay at $15,000.
a. What is the expected value of his investment?
What should the investor do if he is risk neutral?
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At a local community college, 51% of students who enter the college as freshmen go on to graduate. Six freshmen are randomly selected.
What is the probability that none of them graduates from the local college? (Round your intermediate calculations and final answer to 4 decimal places.)
What is the probability that at most five will graduate from the local college? (Round your intermediate calculations and final answer to 4 decimal places.)
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Calculate the mean, the variance, and the standard deviation of the following discrete probability distribution. (Negative values should be indicated by a minus sign. Round your intermediate calculations to 4 decimal places and final answers to 2 decimal places.)
Market observers are quite uncertain whether the stock market has bottomed out from the economic meltdown that began in 2008. In an interview on March 8, 2009, CNBC interviewed two prominent economists who offered differing views on whether the U.S. economy was getting stronger or weaker. An investor not wanting to miss out on possible investment opportunities considers investing $15,000 in the stock market. He believes that the probability is 0.20 that the market will improve, 0.47 that it will stay the same, and 0.33 that it will deteriorate. Further, if the economy improves, he expects his investment to grow to $19,000, but it can also go down to $9,000 if the economy deteriorates. If the economy stays the same, his investment will stay at $15,000.
Explanation / Answer
Ans 1.a)Expected value of investment from stocks=0.2x19000+0.47x15000+0.33x9000
=3800+7050+2970
=13820
b)Under finance, risk neutral preferences are neither risk averse nor are they risk seeking. A risk neutral person's decisions are not impacted by the degree of uncertainty in a given set of outcomes, hence he is indifferent between choices with same expected payoffs even if one choice is riskier.
Ans 2-.a)g=.51, f=.49
49^6=.0138 the probability that none of them graduates from the local college.
.
b)1 - .0175 = .9824 the probability that at most five will graduate from the local college.
.
c)6*.51=3.06 the expected number that will graduate.
Ans3=Mean
-23x.5+(-17x.25)+(-9x.15)+(-3x.1)
=-17.4
variance
264.5+72.25+12.15+.9-302.76
=47.04
standard deviation=6.85
=
.
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