Question

Question 4 [5 points] You have $1000 to invest and are considering buying some combination of the shares of two companies, Elephantinc and Lioninc Shares of Elephantinc will pay a 5 percent return if the Conservatives are elected an event you believe to have a 60 percent probability, otherwise the shares pay a zero return. Shares of LionInc will pay 10 percent if the Liberals are elected (a 40 percent probability), zero otherwise. Either the Liberals or the Conservatives will be elected. Note: Keep as much precision as possible during your calculations. Your final answer should be accurate to at least two decimal places a) If your only concern is maximizing your average expected return, with no regard for risk, how should you invest your $1000? Elephantinc $ 1.000 Lioninc $ 0 b) Devise an investment strategy that guarantees at least a 3.25 percent return, no matter which party wins the election Elephantinc $ 571.43 Lioninc $ 428.57 c) Devise an investment strategy that is riskless, that is, one in which the return on your $1000 does not depend at all on which party wins. Elephantinc SO Lioninc $0 SAVE AND CLOSE Official Time: 23:14:35 SUBMIT AND MARK

Answer 1

mune (a) For maximizing rg-return , we should innest the in where return is ligne. For binne, retra- no 56. & 60%. = 32 For L Inc., se reton- 18x nov. – us. 731. Innest all money in L. Inc. . Et Eine: $10 - Inc. $11,000 (bj To achieve a grecanteed return of 3.25%, we need - a strategy that pronantees at least $32.5. For E-Inc, s=54. retun - $32.5 St.of inv. – 22.5 Ins. – 325- $1650) for La Inc - 1000 - 650 - $1350) OOS c) Let it be the no. of dollars you bet on the Liberals. . bet on conservatives = 1000-D (50) - 101 Cloco - 1 (5.10) = love – (104.) D. " (151) - l0ve & Danoce - 666.67 in o E Inc. - - £1666.67 ļ L-Inc ! = 1000 - DE $1337.33) OS THƯ CHƯA

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