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An individual is offered the opportunity to invest 74 in either of two risky assets, asset A and asset B: Asset A delivers a return
An individual is offered the opportunity to invest 74 in either of two risky assets, asset A and asset B: Asset A delivers a return after one year of; 50 with probability 0.4; 80 with probability 0.3; or 120 with probability 0.3 Asset B delivers a return after one year of; 40 with probability 0.1; 80 with probability 0.7; or 100 with probability 0.2 Answer the following: i. What is the expected return on an investment in Asset A and Asset B, respectively? (3 marks) ii. What is the standard deviation of returns for each asset? (3 marks) iii. If the risk free rate is 4% compounded annually, what is the risk premium provided by each asset? (2 marks) iv. In which of the two assets would a risk averse investor prefer to invest and why? (2 marks)
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