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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

  1. 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:
    1. Which investment should you choose to maximize your expected return: stocks, bonds, or commodities? (15p)
    2. 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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