Suppose You Are an Investor with a Choice Between Three $\quad$

question 76

Essay

Suppose you are an investor with a choice between three securities that are identical in every way except in terms of their rates of return and risk.
Investment A: $\quad$ Total return = 10 percent with probability 50 percent
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Total return = 20 percent with probability 50 percent

Investment B: $\quad$ Total return = 12 percent with probability 40 percent
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Total return = 18 percent with probability 60 percent

Investment C: $\quad$ Total return = 5 percent with probability 60 percent
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Total return = 25 percent with probability 40 percent

a.Which investment provides the highest expected return? Show your work by calculating the expected return of all three investments.
b.Calculate the standard deviation of all three investments.
c.What type of investor might prefer investment A? Who might prefer investment B?

---

Definitions:

Longer Wavelengths

Describes the property of light or electromagnetic waves characterized by greater distances between wave peaks, often associated with lower frequencies and energies.

Red

A primary color that is at the end of the visible spectrum of light, next to orange and opposite violet, often associated with danger, passion, and energy.

Top-down Processing

An approach to perception that emphasizes the importance of conceptual knowledge, expectations, and memory in interpreting sensory information.

Interpretation

The action of explaining the meaning of something, often within specific contexts like art, literature, data, or events.