You have $100,000 to invest and you are choosing between investing in two funds: Slow and Somewhat Steady (SASS) and Wild Ride (WR). Each year, the return on SASS is either 0% or 10% with returning 0% or 10% being equally likely. Wild Ride either returns 90% or -47% every year with returning 90% or -47% being equally likely. The return varies each year and is not affected by what happened last year. You will invest for 2 years and whichever investment you choose is the one in which you will invest for both years.
a) If you invest in SASS and it go well both years, how much money will you have at the end?
b) If you invest in SASS and it goes poorly both years, how much money will you have at the end?
c) If you invest in SASS and it goes well in one year and poorly in the other, how much money will you have at the end?
d) If you invest in SASS, how much money would you expect to have in two years?
e) Using you result from part d, what annual rate of return would you expect to make by investing in SASS over two years? How does this compare to SASS’ reported 5% average yearly returns?
f) If you invest in WR and it go well both years, how much money will you have at the end?
g) If you invest in WR and it goes poorly both years, how much money will you have at the end?
h) If you invest in WR and it goes well in one year and poorly in the other, how much money will you have at the end?
i) If you invest in WR, how much money would you expect to have in two years?
j) Using you result from part i, what annual rate of return would you expect to make by investing in WR over two years? How does this compare to WR’s reported 21.5% average yearly returns?
k) Would you choose to invest in SASS or WR? Why?