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You have estimated the following probabilities for earnings per share of companies X and Y: Probability X Y 0.2 0.5 0 0.3 1 0.5 0.1

You have estimated the following probabilities for earnings per share of companies X and Y:

Probability

X

Y

0.2

0.5

0

0.3

1

0.5

0.1

1.5

0.5

0.4

2

1

  1. Calculate the mean and the standard deviation of the earnings per share for each company.
  2. Explain how some investors might choose X and others might choose Y if preferences are based on mean and variance. Illustrate your answer with graphs.
  3. Compare X and Y, using the second-order stochastic dominance criterion.

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