Question
Suppose that a security costs $3,000 today and pays off some amount b in one year. Further, suppose that b is uncertain according to the
Suppose that a security costs $3,000 today and pays off some amount b in one year. Further, suppose that b is uncertain according to the following table of probabilities: b: Probability: $3,000 0.1 $3,300 0.2 $3,600 0.3 $3,900 0.2 $4,200 0.2 a. Calculate the return (in percent) for each value of b. (Note: You may just calculate the total return and not worry about how this is split up between current yield and capital-gains yield.) b. Calculate the expected return. Show your work. c. Calculate the standard deviations of the return. Show your work. d. Suppose that an investor has a choice between buying this security or purchasing different security that also costs $3,000 today but pays off $3,300 with certainty in one year. Explain in words, how an investor's choice of which security to purchase related to his degree of risk aversion in this example.
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Lets break down each part of this question Part A Calculate the return in percent for each value of b First we must calculate the return for each value of b The return can be calculated using the form...Get Instant Access to Expert-Tailored Solutions
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