Question

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Investment advisors recommend risk reduction through international diversification. International investing allows you to take advantage of the potential for growth in foreign economies, particularly in emerging markets. Janice Wong is considering investment in either Europe or Asia. She has studied these markets and believes that both markets will be influenced by the U.S. economy, which has a 15% chance for being good, a 48% chance for being fair, and a 37% chance for being poor. Probability distributions of the returns for these markets are given in the accompanying table. State of the U.S. Economy Good Fair Poor Returns in Europe 13% 5% -5% Returns in Asia 30% 7% -20% a. Find the expected value and the standard deviation of returns in Europe and Asia. (Round intermediate calculations to 4 decimal places and final answers to 2 decimal places.) Europe Asia % Expected value Standard deviation b. What will Janice pick as an investment if she is risk neutral? Investment in Asia Investment in Europe

Answer 1

Solution:- From the en, a) Ps Cenood)=01S P&CFair o 48 P& CPoo) O.33 expec td value and the Standord deviation of setums ih Europe = o.1S 13+0 48* 5 +0.3+ ( -s) = .5% Stondard deviation of setums in Europe (13-a.5) (5-25)t0.37* C.5) Saysrt G.35% extected value and -he standard deviahon of retums in Asio +o3() Eo.1S 0+o.u8 6.o Standad deviation of veturns in Eunop e SCo1530- k0)0us+ (7-6.0)0(-5-601) b) A-f she is visk neutral then he should investmernt n Asia Cs Scanned with CamScanner Thank you.