An Investor Is Looking at Three Possible Investments: Growth Stock

question 47

Short Answer

An investor is looking at three possible investments: growth stock, blue chip stock, or municipal bonds. The investment performance will vary depending on the investment market condition of bull (market rising), flat, or bear (market falling). The investment return for each investment for the corresponding market conditions is given below.
Which investment would the investor select if using the maximin criterion?

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Definitions:

Risk-Free Rate

The theoretical rate of return of an investment with zero risk, often represented by the yield on government bonds.

Standard Deviation

Square root of the variance.

Alpha

In investing, alpha is a measure of the performance of an investment relative to a suitable benchmark index, indicating excess or deficient return.

Security

A financial instrument representing ownership in a publicly-traded corporation (stock), a creditor relationship with a government or corporation (bond), or rights to ownership as represented by an option.