Part 2. Explain your answers.

a) Consider two companies. Company A has an expected return of 10% and a standard deviation of 20%. Company B has an expected return of 10% and a standard deviation of 5%. Which company would you rather invest in and why?

b) US stocks have an approximate average a return of about 10 %/year with a standard deviation of 20%. Assuming a normal distribution (bell curve), about what percent of the time do US stocks: a. Earn more than 30% in a year? b. Lose more than -10% in a year?

c) Assume I short sell 10 shares of TSLA today (price: $1000) with a 30% margin requirement. What is my return rate if TSLA price is $900 a month from now?

d) Assume youre calculating the Present Value of an amount you expect to receive in 10 years. You do two calculations (1) with a 5% discount rate, (2) with an 8% discount rate. Which calculation will yield a higher Present Value? Why?