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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Definitions:

Corporate Securities

Refers to financial instruments issued by corporations, such as stocks and bonds, representing an ownership stake or a debt obligation.

Ponzi Scheme

A fraudulent investing scam promising high rates of return with little risk to investors, which generates returns for older investors through revenue paid by new investors, rather than from legitimate business activities.

Sarbanes-Oxley Act

An act that criminalizes specific nonaudit services when provided by a registered accounting firm to an audit client; also increases the punishment for a number of white-collar offenses. Also known as the Public Company Accounting Reform and Investor Protection Act of 2002.

Investment Company Act

A U.S. federal law enacted in 1940 aimed at regulating investment companies to protect investors by enforcing transparency and reducing conflicts of interest.