EXERCISE #2: Assuming that you are a RISK TAKER,

For the following choose one of the 2 options by circling either a) or b). In addition calculate the expected value (EV) and briefly explain the logic of your choice.

a) $50,000

OR

b) 100 coin flips each of which has a

1. 50% chance of $800 (Heads)

2. 50% chance of $150 (Tails)

EV = $

NOTE: you should use the binomial calculator to assess the probability of the 100 coin flips exceeding $50,000. If you achieve 54 or more Heads you will exceed $50,000.

(4 points)

EXERCISE #3:

Historically the S&P 500 Index has returned about 8% a year but returns are very uneven as recent experience has reminded us - the INDEX declined by more than 50% from its peak in 2007 and took 7 years to attain that peak level again. Last year (2020), from the middle of February through late March the S & P 500 Index lost about 34% of its value. It has recovered from this low to gain about 66% through Oct. 29, 2021. Bottom line, the market can fluctuate both up and down to a significant degree.

In contrast a typical Money Market Fund has returned about 1% a year in the last few years with minimal fluctuation. Given this, evaluate the following scenarios:

a) You are considering spending $20,000 to purchase a common stock S&P 500 Index Fund. Assuming that you plan to use this Fund as a house down payment 1 year from now, how risky would you consider this investment? Briefly discuss your perception of risk in this decision, given your objective.

Very low Very high

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b) How risky would it be if you planned to use this S&P 500 Index Fund as the major component of your retirement funds, to be accessed approximately 40 years from now? Briefly discuss your perception of risk in this decision, given your objective.

Very low Very high

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c) You are considering investing $20,000 in a Money Market fund. If you plan to use this fund as a house down payment 1 year from now, how risky would you consider this investment? Briefly discuss your perception of risk in this decision, given your objective.

Very low Very high

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d) How risky would it be if you planned to use the Money Market fund as a major component of your retirement fund, approximately 40 years from now? Briefly discuss your perception of risk in this decision, given your objective!

Very low Very high

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