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Problem 3 There are three investments, B1, B2 and B3. All of them have the same expected value and each with two possible payoffs. The
Problem 3 There are three investments, B1, B2 and B3. All of them have the same expected value and each with two possible payoffs. The payoffs from investment By are independent from payoffs from B, and B3. The payoffs from B2 and B3 are perfectly negatively correlated, which means that when B, has a high payoff, B3 has a low payoff, and vice versa. An investor has only $800 to invest. Find the investment strategy that minimizes the risk. Hint: It may be easier to think of the following situation. Let events F and G be independent. The following is given: Payoff from investing $100 in either B, or B3 Cases B2 B3 Probability event F happens $100 $140 0.5 event F does not happen $140 $100 0.5 and Payoff from investing $100 in B1 Cases Bi Probability event G happens $100 0.5 event G does not happen $140 0.5
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