Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN: 9781305506381
Author: James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher: Cengage Learning
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Question
Chapter 2, Problem 6E
To determine
The riskier investment on the basis of expected returns and standard deviation of returns.
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Consider an investment that pays off $700 or $1,600 per $1,000 invested with equal probability. Suppose you have $1,000 but are
willing to borrow to increase your expected return. What would happen to the expected value and standard deviation of the
investment if you borrowed an additional $1,000 and invested a total of $2,000? What if you borrowed $2,000 to invest a total of
$3,000?
Instructions: Fill in the table below to answer the questions above. Enter your responses as whole numbers and enter percentage
values as percentages not decimals (.e., 20% not 0.20). Enter a negative sign (-) to indicate a negative number if necessary.
Invest $1,000
Invest $2,000
Invest $3,000
Expected Value Percent Increase Standard Deviation
1150
S
28 %
$
8
%
$
Expected Return
N/A
Doubled
Tripled
:
#
What is the risk premium(s)?
Given a choice between two investments with the same expected payoff:
a. Most people will choose the one with the lower standard deviation
b. Most people will opt for the one with the higher standard deviation
c. Most people will be indifferent since the expected payoffs are the same
d. Most people will calculate the variance to assess the relative risks of the two choices
Chapter 2 Solutions
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
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