Problem 1

You have inherited a lottery ticket that may be a $5,000 winner. You have a 35% chance of winning the $5,000 and a 65% chance of winning $0. You have an opportunity to sell the lottery ticket for $1,500. What is your expected return and what should you do if are risk neutral?

Problem 2

An investor has a $120,000 portfolio of which $50,000 has been invested in Stock A and the remainder in Stock B. Other characteristics of the portfolio are as follows:

Stock A Stock B E(RA ) = MA = 11.2% E(RB ) = UB = 8.6% OA = 15.93% OB = 9.65% Cov(RA,RB ) = JAB = 38.20%