Question
An investor with $10,000 available to invest has the following options: (1) he can invest in a risk-free savings account with a guaranteed 3% annual
An investor with $10,000 available to invest has the following options: (1) he can invest in a risk-free savings account with a guaranteed 3% annual rate ofreturn; (2) he can invest in a fairly safe stock, where the possible annual rates of return are 6%, 8%, or 10%; or (3) he can invest in a more risky stock, wherethe possible annual rates of return are 1%, 9%, or 17%. The investor can place all of his available funds in any one of these options, or he can split his $10,000 into two $5000 investments in any two of these options. The joint probability distribution of the possible return rates for the two stocks is given in the file P06_34.xlsx. a.Identify the strategy that maximizes the investor's expected one-year earnings. b.Perform a sensitivity analysis on the optimal decision, letting the amount available to invest and the risk-free return both vary, one at a time, plus or minus 100% from their base values, and summarize your findings.
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