Suppose the risk-free interest rate is 5%, and the stock market will return either 40% or 20%

Question:

Suppose the risk-free interest rate is 5%, and the stock market will return either 40% or −20% 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 for a longer period decrease your risk?
Stocks
Stocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing...