Determining standard deviation of returns


Assignment:

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 20% chance for being good, a 50% chance for being fair, and a 30% chance for being poor. Probability distributions of the returns for these markets are given in the accompanying table.

State of U.S. Economy Returns in Europe Returns in Asia
Good 10% 18%
Fair 6% 10%
Poor -6% -12%

a. Find the expected value and the standard deviation of returns in Europe and Asia.
b. What will Janice pick as an investment if she is risk neutral?
c. Discuss Janice's decision if she is risk averse.

Provide complete and step by step solution for the question and show calculations and use formulas.

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Basic Statistics: Determining standard deviation of returns
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