Stock ROI
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Julie is considering buying stock in and only one of the following companies Uninvest.com which runs a website against geared retirement income and has a 10% probability of returning 20% this year and 90% probability of returning 7% or speculate incorporate will invest in type derivate security and has a 50% chance of returning 0% this year and a 50% chance of returning 50%
a. What are the expected returns to invest in uninvest.com and speculate
b. What are the standard deviations of the returns to Uninvest.com and speculate.
c. If Julie is vary risk adverse which company stock should she buy?
d. If Julie is risk neutral which company stock should she buy?
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Solution Summary
This solution helps with a question about buying stocks. The questions answered involve expected returns, standard deviations, and risk aversion.
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1. expected return of uninvest is 0.1 X 25% + 0.9 X 7% = 8.8%
variance = 0.1 X (25%-8.8%)^2 + 0.9 X (7%-8.8%)^2 = 0.0069
so s.d. = sqrt (variance) = 0.083
expected return of speculate = 0.5 X 0 + 0.5 X ...
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