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You plan to invest $3 million in the construction of an oil well which has a potential revenue of $10 million. The oil well will be located in the Golf of Mexico. As we all know, this region is constantly hit by hurricanes. Assuming that if there is a hurricane of category 1 or 2, this will disrupt your production and the well will produce half its capacity, and if there is a category 3 or 4, your well will produce one ?fth of its capacity, if there is a category 5 your well will be closed. In order to reduce the risk on your investment you plan to buy an insurance policy. One unit of this policy cost $1 and will pay $2 if the region is hit with a storm of category 1 or 2, $4 if the region is hit with a storm of category 3 or 4, and $6 if the region is hit by a storm of category 5. We know from the weather prediction that there is 40% chance that the region will be hit with a category 1 or 2 storm, 20% for a category 3, or 4, and 10% for a category 5, 30% chance that the region will not be hit.
1. What is the expected rate of return on your investment if you buy u units of this policy?
2. What is the variance of the rate of return on your investment if you buy u units of this policy?
3. What is the number of units that will minimize variance, and what is the corresponding rate of return?
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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