Suppose the risk-free interest rate is 3%, and the stock market will retum either + 25% or -21% 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 payof? c. Does holding stocks for a longer period decrease your risk? a. Which strategy has the highest expected final payof? The two possible outcomes for investment (1) aro % or %. (Enter the outcomes from largest to smallest and round to one decimal place.) The four possble outcomes for investment (2) are % or % or % or%. (Enter the outcomes from largest to amalost and round to one decimal place.) The expected return for investment (1) is. (Round to one decimal place.) The expected return for Investment (2) is%. (Round to one decimal place.) The strategy with the highest expected final payoff is (Select from the drop-down menu.) b. Which strategy has the highest standard deviation for the final payoft? The standard deviation for investment (1) is% (Round to one decimal place.) The standard deviation for investment (2) is%. (Round to one decimal place.) The investment with the highest volatity is (Select from the drop-down menu.) c. Does holding stocks for a longer period decrease your risk? The answer is (Select from the drop-down menu.)
Suppose the risk-free interest rate is 3%, and the stock market will retum either + 25% or -21% 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 payof? c. Does holding stocks for a longer period decrease your risk? a. Which strategy has the highest expected final payof? The two possible outcomes for investment (1) aro % or %. (Enter the outcomes from largest to smallest and round to one decimal place.) The four possble outcomes for investment (2) are % or % or % or%. (Enter the outcomes from largest to amalost and round to one decimal place.) The expected return for investment (1) is. (Round to one decimal place.) The expected return for Investment (2) is%. (Round to one decimal place.) The strategy with the highest expected final payoff is (Select from the drop-down menu.) b. Which strategy has the highest standard deviation for the final payoft? The standard deviation for investment (1) is% (Round to one decimal place.) The standard deviation for investment (2) is%. (Round to one decimal place.) The investment with the highest volatity is (Select from the drop-down menu.) c. Does holding stocks for a longer period decrease your risk? The answer is (Select from the drop-down menu.)
Chapter7: Uncertainty
Section: Chapter Questions
Problem 7.14P
Related questions
Question
E2
Transcribed Image Text:Suppose the risk-free interest rate is 3%, and the stock market will retum either + 25% or -21% 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 stocks for a longer period decrease your risk?
a. Which strategy has the highest expected final payoff?
The two possible outcomes for investment (1) are % or %. (Enter the outcomes from largest to smallest and round to one decimal place.)
The four possible outcomes for investment (2) are % or % or % or%. (Enter the outcomes from largest to smallest and round to one decimal place.)
The expected return for investment (1) is %. (Round to one decimal place.)
The expected return for investment (2) is %. (Round to one decimal place.)
The strategy with the highest expected final payoff is
(Select from the drop-down menu.)
b. Which strategy has the highest standard deviation for the final payoff?
The standard deviation for investment (1) is%. (Round to one decimal place.)
The standard deviation for investment (2) is %. (Round to one decimal place.)
The investment with the highest volatility is
V. (Select from the drop-down menu.)
c. Does holding stocks for a longer period decrease your risk?
The answer is
V (Select from the drop-down menu.)
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Brief Principles of Macroeconomics (MindTap Cours…
Economics
ISBN:
9781337091985
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Essentials of Economics (MindTap Course List)
Economics
ISBN:
9781337091992
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Brief Principles of Macroeconomics (MindTap Cours…
Economics
ISBN:
9781337091985
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Essentials of Economics (MindTap Course List)
Economics
ISBN:
9781337091992
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: Applications, Strategies an…
Economics
ISBN:
9781305506381
Author:
James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:
Cengage Learning