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 25% chance for being good, a 56% chance for being fair, and a 19% chance for being poor. Probability distributions of the returns for these markets are given in the accompanying table. State of the U.S. Economy Good Fair Poor Returns in Europe 17% 4% -4% Returns in Asia 22% 5% -6% a. Find the expected value and the standard deviation of returns in Europe and Asia. (Round intermediate calculations to at least 4 decimal places and final answers to 2 decimal places.) Expected value Standard deviation Europe 5.73 % % Asia % % b. What will Janice pick as an investment if she is risk neutral?

          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 25% chance for being good, a 56% chance for being fair, and a 19% chance for being poor. Probability distributions of the returns for these markets are given in the accompanying table.

State of the U.S. Economy
Good
Fair
Poor
Returns in Europe
17%
4%
-4%
Returns in Asia
22%
5%
-6%

a. Find the expected value and the standard deviation of returns in Europe and Asia. (Round intermediate calculations to at least 4 decimal places and final answers to 2 decimal places.)

Expected value
Standard deviation
Europe
5.73 %
%
Asia
%
%

b. What will Janice pick as an investment if she is risk neutral?

Show more…

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 25% chance for being good, a 56% chance for being fair, and a 19% chance for being poor. Probability distributions of the returns for these markets are given in the accompanying table.

State of the U.S. Economy
Good
Fair
Poor
Returns in Europe
17%
4%
-4%
Returns in Asia
22%
5%
-6%

a. Find the expected value and the standard deviation of returns in Europe and Asia. (Round intermediate calculations to at least 4 decimal places and final answers to 2 decimal places.)

Expected value
Standard deviation
Europe
5.73 %
%
Asia
%
%

b. What will Janice pick as an investment if she is risk neutral?

Added by Queeennn K.

Elementary Statistics a Step by Step Approach

Allan G. Bluman 9th Edition

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Solved by Expert Supreeta N

03/20/2023

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Step 1: Calculate the expected value for the given values and probabilities. Show more…

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Transcript

00:01 Hello students according to the given question we have to find the expected values, expected value and standard deviation.

00:11 So they have given data.

00:17 So in the a bit for europe we have to construct a table that is x value probability values x into probability of x values and x squared into probability of x values and x squared into p of x.

00:36 So given 17, 4 and minus 4.

00:41 So probability values are given 0 .25, 0 .56, 0 .19.

00:49 So by multiplying 4 .25, 2 .24, minus 0 .76.

00:56 So here it is 72 .25, 8 .96, 3 .0 .05 .5.

01:03 3 .0 .75 .5.

01:04 6 .6 .6.

01:04 6 .6.

01:04 6 .6 .5.

01:04 So the total is 1.

01:07 Here it is 5 .73.

01:10 It is 84 .25.

01:14 Now the mean value that is expectation of x formula summation x into p of x.

01:22 From the above table it is 5 .73.

01:26 Now variance expectation of x square minus expectation of x whole square.

01:33 So that is from the table 84 .25 minus 5 .73 whole square.

01:42 That is 51 .471.

01:46 So then standard deviation will be root of variance that is equal to 7 .1706...

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