Suppose you are risk neutral and you are deciding between two investments. One has a guaranteed...
Suppose you are risk neutral and you are deciding between two investments. One has a guaranteed return of 2% while the second has a 60% chance of a 10% return and a 40% chance of a -5% return. Which investment would you choose? Why?
Homework Answers
rate positively ..
| Option I | |||||||
| Return = | 2% | ||||||
| Option II | We have to compute expected return | ||||||
| Expected return = 60%*10%+40%*-5% | |||||||
| 4.00% | |||||||
| therefore, we can see that option II has higher return compared to option I | |||||||
| We should selected option II | |||||||
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