Suppose that a security costs $3000today and pays off some amount b in one year.

ID: 437123 • Letter: S

Question

Suppose that a security costs $3000today and pays off some amount b in one year. suppose that b is uncertain accorrding to the following table of probabilities.

B________$3000_____$3300__________$3600________$3900________$4200
Probability0.1_______0.2_____________0.3__________0.2__________0.2

a.Calculate the return (in Percent) for each value of b. (note: you may just calculate the totaal return and not worry about how this split between current yield and capital- gains yield)
B.Calculate the expected return (in Percent)
C.Calculate the standard deviation of the returnn

D. Suppose that an investor has choice between buying this security or purchasing a different secuirty that also cost $3000 today but pays off $3300 with certainty in one year. How is an investor's choice of which secuirty to purchase related to his degree of risk aversion

Explanation / Answer

a. 100%, 110%, 120%, 130%, 140% b. E(X)=(0.1)(100)+(0.2)(110)+(0.3)(120)+(0.2)(130)+(0.2)(140) = 122% c. [E(X)]^2 = 14884 E(X^2) = 15040 E(X^2) - [E(X)]^2 = 156 sd = sqrt(156)= 12.49%

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Suppose that a security costs $3000today and pays off some amount b in one year.

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Explanation / Answer

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