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Suppose the​ risk-free interest rate is 5 %​, and the stock market will return either plus...

Suppose the​ risk-free interest rate is 5 %​, and the stock market will return either plus 28 % or negative 17 % each​ year, with each outcome equally likely. Compare the following two investment​ strategies: (1) invest for one year in the​ risk-free investment, and one year in the​ market, or​ (2) invest for both years in the market.

a. Which strategy has the highest expected final​ payoff? (Two possible outcomes)

b. Which strategy has the highest standard deviation for the final​ payoff?

c. Does holding stocks for a longer period decrease your​ risk?

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Expert Solution

jeff jeffy answered 3 months ago
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