Question

You plan to invest $2,000 in a corporate stock fund or in a common fund. Under certain conditions, the yield of the fund is as follows: Probability Condition Corporate Return Common Fund Return 0.10 Recession -$200 -$150 0.15 Stagnation $100 $80 0.35 Slow Growth $200 $200 0.30 Moderate Growth $400 $500 0.10 Fast Growth $600 $550 Question 10 (1 point) Which investment has greater risk? Why?

Answer 1

for corporate return:

x	P(x)	xP(x)	x2P(x)
-200	0.100	-20.000	4000.000
100	0.150	15.000	1500.000
200	0.350	70.000	14000.000
400	0.300	120.000	48000.000
600	0.100	60.000	36000.000
	total	245.000	103500.000
	E(x) =μ=	ΣxP(x) =	245.0000
	E(x2) =	Σx2P(x) =	103500.0000
	Var(x)=σ2 =	E(x2)-(E(x))2=	43475.000
	std deviation=	σ= √σ2 =	208.507

standard deviation of Corporate stock=208.51

for common fund :

x	P(x)	xP(x)	x2P(x)
-150	0.100	-15.000	2250.000
80	0.150	12.000	960.000
200	0.350	70.000	14000.000
500	0.300	150.000	75000.000
550	0.100	55.000	30250.000
	total	272.000	122460.000
	E(x) =μ=	ΣxP(x) =	272.0000
	E(x2) =	Σx2P(x) =	122460.0000
	Var(x)=σ2 =	E(x2)-(E(x))2=	48476.000
	std deviation=	σ= √σ2 =	220.173

standard deviation of Common fund=220.17

as standard deviation of Common fund is higher therefore it has greater risk.