Question

1. An investor puts $2,000 into an investment that will pay $2,500 one-fourth of the time; $2,000 one-half of the time, and $1,750 the rest of the time. What is the investor's expected return?

2. An investment will pay $2000 a quarter of the time; $1,600 half of the time and $1,400 a quarter of the time. The standard deviation of this asset is:

3. Investment A pays $1,200 half of the time and $800 half of the time. Investment B pays $1,400 half of the time and $600 half of the time. Which of the following statements is correct?

a. Investment A and B have the same expected value, but A has a greater risk

b. Investment B has a higher expected value than A, but also greater risk.

c. Investment A has a greater expected value than B, but B has less risk.

d. None of the statements are correct.

Answer 1

Explanation for part 3 : Mean of the return gives the expected value while the standard deviation gives the measure of risk. Fr investments A & B, the mean of returns is same hence value is same while standard deviation of B is more than that of A. Hence B is riskier than A. Therefore none of the statements are correct. Hence option D.