You are given the following payoff table showing the possible annual returns of three securities for the year 2019 under different economic conditions. You considering just a single-security investment. Higher GrowthLikely GrowthLower GrowthSavings Account664Bond91215Stock3221-5Probability0.200.60? Required:Explain the meaning of 32 and 12 in the payoff table.Which security would you consider for investment based on the expected return?Which security would you consider for investment based on risk? Advise on the optimum rational decision and explain why?

1. Meaning of 32 : It means if you invest in the stock then there are 20% probability that your…

Explain the meaning of 32 and 12 in the payoff table. Which security would you consider for investment based on the expected return? Which security would you consider for investment based on risk? Advise on the optimum rational decision and explain why?

Explain the meaning of 32 and 12 in the payoff table. Which security would you consider for investment based on the expected return? Which security would you consider for investment based on risk? Advise on the optimum rational decision and explain why?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 20P

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Question

You are given the following payoff table showing the possible annual returns of three securities for the year 2019 under different economic conditions. You considering just a single-security investment.


	Higher Growth	Likely Growth	Lower Growth
Savings Account	6	6	4
Bond	9	12	15
Stock	32	21	-5
Probability	0.20	0.60	?

Required:

Explain the meaning of 32 and 12 in the payoff table.
Which security would you consider for investment based on the expected return?
Which security would you consider for investment based on risk?

Advise on the optimum rational decision and explain why?

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Step 1 Meaning of 32 and 12 in the pay off table

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Step 2 finding out missing probability

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Step 3 calculation of expected return

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Step 4 security would you consider for investment based on the expected return

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Step 5 security would you consider for investment based on risk

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Step 6 optimum rational decision

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