Problem
Suppose you are an investor with a choice between three securities that are identical in every way except in terms of their rates of return and risk. Show your work.
Investment A: Total return = 15 percent with probability 40 percent
Total return = 25 percent with probability 60 percent
Investment B: Total return = 15 percent with probability 50 percent
Total return = 25 percent with probability 50 percent
Investment C: Total return = 15 percent with probability 60 percent
Total return = 25 percent with probability 40 percent
Task
1. Which investment provides the highest expected return? Calculate the expected return of all three investments.
2. Calculate the standard deviation of all three investments.
3. Which of the three investments would you buy? Why? Explain.