Suppose you consider investing some of your wealth in one of three investment portfolios. Your financial adviser provides you with the following table, which gives the probabilities of possible returns from each:Gold Food Automobile Probability ReturnProbability ReturnProbability Return0.215%0.415%0.220%0.38.3%0.65%0.2512%0.210% 0.256%0.35% 0.25% 0.10%Which investment should you choose to maximize your expected return: gold, food, or automobile? If you are risk-averse and have to choose between the gold and the food investments, which should you choose? Why? Explain briefly.

Expected return =p1 r1+p2 r2+p3 re p=probability and r=rate of return

Answered: Suppose you consider investing some of…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 5P

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Suppose you consider investing some of your wealth in one of three investment portfolios. Your financial adviser provides you with the following table, which gives the probabilities of possible returns from each:

Gold		Food		Automobile
Probability	Return	Probability	Return	Probability	Return
0.2	15%	0.4	15%	0.2	20%
0.3	8.3%	0.6	5%	0.25	12%
0.2	10%			0.25	6%
0.3	5%			0.2	5%
					0.10%

Which investment should you choose to maximize your expected return: gold, food, or automobile?
If you are risk-averse and have to choose between the gold and the food investments, which should you choose? Why? Explain briefly.

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