Suppose your dear old Grandfather approaches you for investment advice. He knows of your great training...

Suppose your dear old Grandfather approaches you for investment advice. He knows of your great training in finance and statistics and gives the following instructions. "I have lived a long time and through many challenges. But the recent financial upheaval, with its ups and downs, is too much for me to bear. Just pick for me a portfolio with the least risk." Suppose there are portfolios (A, B, and C) to choose from, and next year the economy will be in an expansion, normal, or recession state with probabilities 0.47, 0.37, and 0.16, respectively. The returns (%) on the securities in these states are as follows. Portfolio A {expansion = +14.64, normal = +11.50, recession = +6.50}; Portfolio B {+14.50, +7.50, +3.50}; Portfolio C {+15.00, +9.00, +6.00}. Which investment best fits your grandfather's needs?

Correct answer is Portfolio A. Can you please explain how to get to that result?

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Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

ALL FORMULAS ARE SHOWN. NO EXCEL FUNCTION IS USED

ANSWER : GO FOR PORTFOLIO A, AS IT HAS HIGHER RETURN AND LOWER STANDARD DEVIATION

jeff jeffy answered 1 year ago

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