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Suppose you visit with a financial adviser, and you are considering investing some of your wealth in one of three investment portfolios: stocks, bonds, or
- Suppose you visit with a financial adviser, and you are considering investing some of your wealth in one of three investment portfolios: stocks, bonds, or commodities. Your financial adviser provides you with the following table, which gives the probabilities of possible returns from each investment:
- Which investment should you choose to maximize your expected return: stocks, bonds, or commodities? (15p)
- If you are risk-averse and have to choose between the stock and the bond investments, which should you choose? Why? (25p)
Stocks | Bonds | Commodities | |||
Probability | Return | Probability | Return | Probability | Return |
0.2 | 15% | 0.4 | 15% | 0.2 | 20% |
0.3 | 8.3% | 0.6 | 5% | 0.25 | 12% |
0.2 | 10% | 0.25 | 6% | ||
0.3 | 5% | 0.2 | 5% | ||
0.10% |
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