Question

Chapter 11 Homework You have $500 to invest and are considering buying some combination of the shares of two companies, Donkeyinc and Elephantine. Shares of Dort will pay a return of percent of the Democrats are elected an event you believe to have a 20 percent probability otherwise the shares pay a zero retum. Shares of Elephantine will pay 6 percent of the Republicans are elected a probability of 80 percener otherwise her the Democrats of the Republicans will be clected Instructions: Enter your response percentage rounded to one decimal place you should invest your $1,500 in a. If your only concem is maximizing your average expected return with no regard for Ck to select and your expected return will be C x pected return if you invest in each stock Hint Consider what your return will be if the Democrats win and if win, then weight each outcome by the probability that event occurs) Donkeyince er your response as percentage rounded to two decimal places Elephantine return The strategy of investing $750 in each stock does not give the highest possible average expected return. You would choose it anyway because this strategy guarantees the same retum regardless of which party wins. choose it anyway because the lower return is compensated by this strategy being less risky, as you receive a reasonable return no matter which party w not choose it because a less risky strategy cannot compensate for a lower expected retum not choose it because you should always choose the strategy with the highest average expected return

Answer 1

Kindly upvote:)

@J In Donkey inc.) expected return =-0.240.08 = 1:6%. In Elephant Ine, 1 = 0.8 zox0.06= 4787 . Should invest in Elephant Inc (4.8 % (6) In D-Inc., return = 0.08x45o = $60 In E-Inc., reton = 0.064750 = $-45 Expected returns = Pnemocratic winning & bot Republican with = 0.2 x 60 + .8x45 = 48 0 3.7. - 48 (12/1) x1004. -- 3.21%. xus (d) Let the investment in D-Inc. ben, - investment in E-Inc will be 1500-n. . (008)x= 0.06 (iso 0-1) = ) 2= 642.86 $ 1500-642-86 = $1857.14 in Elephantia & $1642.86 in D Ine e) Expecte + 6 -6G , , , 8x 8c2 - 01 = 0 o & Vo 2x 8x2 . S = $51.43 Expected yeturas - Centro y en los = [-up/.