1. Investment Decision and Portfolio Diversification (a) Consider two investments with the following characteristics. Check if...

 

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1. Investment Decision and Portfolio Diversification (a) Consider two investments with the following characteristics. Check if any investment dominates the other on the basis of the second-order stochastic dominance criterion and provide your evidence. Investment 1 Payoff Prob. 3 0.2 7 0.5 10 0.3 (30 Marks) Investment 2 Payoff Prob. 1 0.3 8 0.3 14 0.4 (b) You are a UK-based portfolio manager considering whether or not to allocate some of the asset to the market index of Japanese stocks. Assume that the standard deviation of the Japanese index is larger than the standard deviation of your portfolio. Show that the addition of the Japanese index ("J") into your portfolio ("Y") will reduce risk (at no loss in returns) provided Pyj 1. Investment Decision and Portfolio Diversification (a) Consider two investments with the following characteristics. Check if any investment dominates the other on the basis of the second-order stochastic dominance criterion and provide your evidence. Investment 1 Payoff Prob. 3 0.2 7 0.5 10 0.3 (30 Marks) Investment 2 Payoff Prob. 1 0.3 8 0.3 14 0.4 (b) You are a UK-based portfolio manager considering whether or not to allocate some of the asset to the market index of Japanese stocks. Assume that the standard deviation of the Japanese index is larger than the standard deviation of your portfolio. Show that the addition of the Japanese index ("J") into your portfolio ("Y") will reduce risk (at no loss in returns) provided Pyj