You are going to invest all of your funds in one of three projects with the foll
ID: 2734369 • Letter: Y
Question
You are going to invest all of your funds in one of three projects with the following distribution of possible returns: (Unit 1)
PROJECT 1
PROJECT 2
Probability
Return
Standard Deviation
Probability
Return
Standard Deviation
50% Chance
20%
12%
30% Chance
30%
19.5%
50% Chance
-4%
40% Chance
10%
30% Chance
-20%
PROJECT 3
Standard
Probability Return Deviation
10% Chance 30% 12%
40% Chance 15%
40% Chance 10%
10% Chance -21%
If you are a risk averse investor, which one should you choose? (Unit 1)
Project 3 is the best investment. Please explain why that is the case.
PROJECT 1
PROJECT 2
Probability
Return
Standard Deviation
Probability
Return
Standard Deviation
50% Chance
20%
12%
30% Chance
30%
19.5%
50% Chance
-4%
40% Chance
10%
30% Chance
-20%
Explanation / Answer
Project 1 and 3 has the same risk of 12% but with the same risk project 3 has more return hence project 3 is the best project
Project 1 Return Probability Expected Return 20% 0.5 10% -4% 0.5 -2% Total Return 8% Project 2 Return Probability Expected Return 30% 0.3 9% 10% 0.4 4% -20% 0.3 -6% Total Return 7% Project 3 Return Probability Expected Return 30% 0.1 3% 15% 0.4 6% 10% 0.4 4% -21% 0.1 -2% Total Return 11%Related Questions
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