Question

Investment advisors recommend risk reduction through international diversification. International investing allows you to take advantage of the potential for growth in foreign economies, particularly in emerging markets. Janice Wong is considering investment in either Europe or Asia. She has studied these markets and believes that both markets will be influenced by the U.S. economy, which has a 21% chance for being good, a 52% chance for being fair, and a 27% chance for being poor. Probability distributions of the returns for these markets are given in the accompanying table. State of the U.S. Economy Returns in Europe Returns in Asia Good 11% 28% Fair 8% 7% Poor −6% −12% a. Find the expected value and the standard deviation of returns in Europe and Asia. (Round answers to 2 decimal places. It will be efficient to do your calculations in Excel.) Europe Asia Expected value % % Standard deviation % % b. What will Janice pick as an investment if she is risk neutral? Investment in Europe Investment in Asia

Answer 1

x	y	f(x,y)	x*f(x,y)	y*f(x,y)	x^2f(x,y)	y^2f(x,y)
11	28	0.21	2.31	5.88	25.41	164.64
8	7	0.52	4.16	3.64	33.28	25.48
-6	-12	0.27	-1.62	-3.24	9.72	38.88
	Total	1	4.85	6.28	68.41	229
	E(X)=ΣxP(x,y)=					4.85
	E(X2)=Σx2P(x,y)=					68.41
	E(Y)=ΣyP(x,y)=					6.28
	E(Y2)=Σy2P(x,y)=					229
	Var(X)=E(X2)-(E(X))2=					44.8875
	Var(Y)=E(Y2)-(E(Y))2=					189.5616

from above   

                  Europe              Asia

expected return                        4.85 6.28

standard deviation 6.70    13.77

b)

Investment in Asia