Question: A.The table below shows the expected returns and volatility of stock X and Y. If you are a risk-averse investor, and you had to choose

A.The table below shows the expected returns and volatility of stock X and Y. If you are a risk-averse investor, and you had to choose to invest in either Stock X or Stock Y, which stock would you choose? Explain (4 marks)

Description Expected return Volatility

Stock X 10% 12%

Stock Y 12% 15%

B. Your uncle has recently retired with two million dollars of superannuation funds. He wants to invest a part of his super fund in fixed income securities, preferably foreign government bonds. He got confused with two different rates since they both are risk-free government bonds. He found Germany Government bonds offer a YTM of 3% whereas Greece Government bonds offer a YTM of 5%.

Explain to your uncle the underlying cause of the 2% differences in YTM between these two Government bonds. Assume your uncle is a risk-averse investor; offer him your valuable advice on investing in one of these two securities. (4 marks)

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