You have the opportunity to invest in one of three restaurants: A, B, or C. You have estimated the rate of return each restaurant will earn under the assump- tions of a bad, normal, and good economic climate over the next year. You have also estimated the probability of each economic climate.

Rate of Return Economic Climate Probability A B Cc Bad 0.4 —10% 0% 5%

Normal 0.5 0% 10% 7%

Good 0.1 200% 15% 10%

Required:

1. Rank the prospects from best to worst on the basis of their expected rate of return. Show all your calculations.

2. Rank the prospects from best to worst on the basis of their total risk. Show all your calculations.

3. If you had to choose between restaurants B and C on the basis of expected return and total risk, which would you choose? Why?

4. Assume that a rational risk-averse investor can borrow or lend freely at a risk-free rate of 10%. Would this investor invest in the restaurant you selected in question 3 above? Why or why not?