Question

In this exercise you are choosing between the following investment strategies:

1. Invest $200 in stock A. Stock A costs $20 per share. Expected yield per share of stock A is $2, and the variance of yield per share is 9 ($-squared).
2. Invest $200 in stock B. Stock B costs $10 per share. Expected yield per share of stock B is $0.90, and the variance of yield per share is 1 ($-squared).
3. Invest $100 in stock A and $100 in stock B. The correlation between yield per share of stock A and yield per share of stock B is 0.12.

Assuming that yields for each stock are approximately normally distributed, with which investment strategy do you have the smallest chance of losing money? Calculate the probability that each investment strategy will result in you losing money.

a.)The probability of losing money is 0.1841 with (i); it is 0.2514 with (ii); and it is 0.1587 with (iii).

b.)The probability of losing money is 0.1587 with (i); it is 0.1841 with (ii); and it is 0.2514 with (iii).

c.)The probability of losing money is 0.2514 with (i); it is 0.1841 with (ii); and it is 0.1587 with (iii).

d.)The probability of losing money is 0.1841 with (i); it is 0.1587 with (ii); and it is 0.2514 with (iii).

Answer 1