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  3. 6. consider an investor who can choose risky asset

6. Consider an investor who can choose risky assets A or B or a riskfree...

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Accounting

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6. Consider an investor who can choose risky assets A or B or a riskfree asset which pays a return of 4 %. The returns for the two risky assets depend on the state of nature, which can be 'high' or 'low' with resp. probabilities p and 1 - p. The possible returns for the two risky stocks are summarised in the following table: Table 5: Returns across states of nature Retrun stock A Return stock B High state (probability = p) 6% 8% Low state (probability =1-P) -3% -5% (a) Assume the investor want to maximise expected returns. If the probability of ending up in the high state is p=0.8, would (s)he choose to invest in stock A, B or the riskfree asset? (15 marks) (b) For which values of p does the investor want to invest in the riskfree asset? [5 marks]

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