Stock A alternates between +20% and −10%

with equal probability. Stock B earns 4.5% per annum.

(a) What is the average rate of return for stock A?

(b) What is the average rate of return for stock B?

(c) How much would each dollar invested today in stock A earn in 10 years?

(d) How much would each dollar invested today in stock B earn in 10 years?

(e) What would a risk-neutral investor prefer on a one-shot basis versus on a multiyear basis?

(f) What is the main reason for what is going on here?