The Table Below Presents Returns Across Three States of Nature

question 11

Multiple Choice

The Table below presents returns across three states of nature for two assets: Risky and Safe. The standard deviation of Safe is 3.2%. What is the difference between the standard deviation of Risky and Safe? (Risky - Safe) $$\begin{array} { | c | c | c | c | } \hline \text { State of Nature } & \text { Probability } & \begin{array} { c } \text { Return to Risky } \\\text { Investment }\end{array} & \begin{array} { c } \text { Return to Safe } \\\text { Investment }\end{array} \\\hline \text { Recession } & 0.2 & - 5 \% & 14 \% \\\hline \text { Normal } & 0.6 & 15 \% & 8 \% \\\hline \text { Boom } & 0.2 & 25 \% & 4 \% \\\hline\end{array}$$

• A)3.6%
• B)4.6%
• C)5.6%
• D)6.6%
• E)7.6%

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Definitions:

Medium-Sized

Referring to something that falls approximately in the middle of a scale or range in terms of size or capacity.

Informational Influence

The change in opinions or behavior that occurs when an individual conforms to what they believe to be the correct response in a specific context, often based on the information provided by others.

Ambiguous Situations

Scenarios or events that lack clear context or guidelines, leading to uncertainty in perception or decision-making.

Pluralistic Ignorance

A psychological state where individuals wrongly believe their thoughts, feelings, or behaviors are different from those of the majority, often leading to conformity with perceived norms.