Consider the issue of optimal investments. Suppose you know of one asset that, every year, offers...

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Consider the issue of optimal investments. Suppose you know of one asset that, every year, offers 5% return with 90% probability, delivering -10% return with 10% probability. Each year one can either sell or turn over (= not sell) the asset for another year. The returns in different years are independent (=unrelated, idiosyncratic). A different asset offer 3% return with 99% probability and -20% return with 1% probability. That asset can also be turned over and its returns are also independent over time. If you define "risk" as the probability that your investment makes a loss greater than 5%, what asset is riskier after two years? What is [roughly] the expected return of the two assets after two years? What asset is riskier after 30 years? What is [roughly] the expected return per year of the two assets after 30 years? After how many years are the risks (as defined above) the same for the two assets? Show how you calculated this. Consider the issue of optimal investments. Suppose you know of one asset that, every year, offers 5% return with 90% probability, delivering -10% return with 10% probability. Each year one can either sell or turn over (= not sell) the asset for another year. The returns in different years are independent (=unrelated, idiosyncratic). A different asset offer 3% return with 99% probability and -20% return with 1% probability. That asset can also be turned over and its returns are also independent over time. If you define "risk" as the probability that your investment makes a loss greater than 5%, what asset is riskier after two years? What is [roughly] the expected return of the two assets after two years? What asset is riskier after 30 years? What is [roughly] the expected return per year of the two assets after 30 years? After how many years are the risks (as defined above) the same for the two assets? Show how you calculated this.

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To determine which asset is riskier after two years we need to compare the probabilities of experiencing a loss greater than 5 for each asset over the ... View the full answer