Homework answers / question archive / Suppose security X achieves 20% return with half chance and -10% return with half chance

Suppose security X achieves 20% return with half chance and -10% return with half chance

Finance

Share With

Suppose security X achieves 20% return with half chance and -10% return with half chance.

(a) What is the expected return of X? What is the risk (return volatility) of X?

(b) Suppose security Y achieves 22% return with 55% chance and -8% return with 45% chance. Suppose you like return and dislike risk (just like all investors). Suppose you can only invest in one of the two securities. Which security (X or Y) would you choose, and why?