Consider the Following Discrete Probability Distributions of Payoffs for 3

question 27

Multiple Choice

Consider the following discrete probability distributions of payoffs for 3 securities that are held in a DI's trading portfolio (payoff amounts shown are in $millions) :
$\begin{array} { | l r r | } \text { SECURITY } & \text { PROBABILITY } & \text { PAYOFF } \\\text { Alpha } & 0.50 & 355 \\& 0.49 & 150 \\& 0.01 & - 300\end{array}$ $\begin{array} { lcc } \text { SECURITY } & \text { PROBABILITY } & \text { PAYOFF } \\\text {Beta } & 0.50 & 1500 \\& 0.49 & - 300 \\& 0.0025 & - 3,300\end{array}$ $\begin{array} { lcc } \text { SECURITY } & \text { PROBABILITY } & \text { PAYOFF } \\\text {Gamma } & 0.49 &400 \\&0.49&150 \\&0.01 &-150 \\&0.01&-2,000\end{array}$
Based on your answers to the previous three questions,which of the following is true?

• A)Security Alpha represents the riskier of the two assets in the trading portfolio because there is a one-percent probability of loss the following day.
• B)Both securities have the same expected payoff;therefore,it makes no difference which is in the trading portfolio.
• C)Security Beta is the better asset to have in the trading portfolio since there is a 50 percent probability of a $400 payoff versus only $355 with security Alpha.
• D)Both securities have the same expected payoff and value at risk (VAR),therefore it makes no difference which is in the trading portfolio.
• E)According to the expected shortfall measure,if tomorrow is a bad trading day,losses will exceed $25 million.

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