Reference no: EM13225040
Suppose that a security costs $1,500 today.
a. Calculate the percentage return on the security if the payoff to the security in one year is $1,000, $1,500, $2,000, or $2,500. (Note: This is the total amount returned to the investor, so you may just calculate the total return and not worry about how this is split up between current yield and capital-gains yield.)
b. If each of the outcomes in part a is equally likely, calculate the expected return on the security.
c. Calculate the standard deviation of the return on the security. (Again, assume that each of the outcomes in part a is equally likely.)
Suppose that a security cost $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. Calculate the return (in percent) for each value of b. (Note: You may just calculate the total return and not worry about how this is split between current yield and capital-gains yield.)
b. Calculate the expected return (in percent).
c. Calculate 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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