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Create two series of return at 5 periods in length. Call them Return Series A and...

Create two series of return at 5 periods in length. Call them Return Series A and Return Series B. These two series of returns are independent of one another and that you are a risk-averse investor, explain which series of returns is preferable. Now, create two series of costs at 5 periods in length. Call them Cost Series C and Cost Series D. These two series of costs are independent of one another and that you hold and aversion to uncertainty, explain which cost series preferable.

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Expert Solution

Let the Stock be IBM.

Return Series A

Date Rate in %

01-Jan-2018 0.01

02-Jan-2018 0.02

03-Jan-2018 0.03

04-Jan-2018 0.04

05-Jan-2018 0.05

Return Series B

Date Rate in %

01-Jan-2018 0.01

02-Jan-2018 -0.0015

03-Jan-2018 0.0125

04-Jan-2018 0.0375

05-Jan-2018 0.06

Return Series A is preferable because the rate of return is increasing steadily and there is no chance of loss. In case of Return Series B there is a chance of loss because the rate of return is fluctuating and in some cases giving negetive rate of return. Hence as a risk averse investor I will prefer Return Series A.

Cost Series C

Date Rate in %

01-Jan-2018 $ 145.00

02-Jan-2018 $ 146.00

03-Jan-2018 $ 147.00

04-Jan-2018 $ 148.00

05-Jan-2018 $ 149.00

Cost Series D

Date Rate in %

01-Jan-2018 $ 145.00

02-Jan-2018 $ 147.00

03-Jan-2018 $ 143.00

04-Jan-2018 $ 142.00

05-Jan-2018 $ 149.00

As a risk averse investor I will prefer cost series C because the price of the stock is increasing constantly and there is not fluctuation in the price of the stock. The chances of loss due to the decrease in price is also minimised. Hence as a risk averse investor I will prefer Cost Series C.

jeff jeffy answered 2 years ago
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