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 20% chance of being good, a 50% chance of being fair, and a 30% chance of being poor. Probability distributions of the returns for these markets are given in the accompanying table.
State of the U.S. Economy
Returns in Europe
Returns in Asia
Good
10%
18%
Fair
6%
10%
Poor
-6%
-12%
a. Find the expected value and the standard deviation of returns in Europe and Asia. (Round your intermediate calculations to 4 decimal places and final answers to 2 decimal places.)
Europe
Expected value: %
Standard deviation: %
Asia
Expected value: %
Standard deviation: %
b. What will Janice pick as an investment if she is risk neutral?
Investment in Europe
Investment in Asia