Suppose the risk-free interest rate is

5%,

and the stock market will return either

+30%

or

26%

each year, with each outcome equally likely. Compare the following two investment strategies: (1) invest for one year in the risk-free investment, and one year in the market, or (2) invest for both years in the market.

a. Which strategy has the highest expected final payoff?

b. Which strategy has the highest standard deviation for the final payoff?

c. Does holding stocks for a longer period decrease your risk?