Use the following data to answer the question below:

State of the Economy          Probability     Return(A)     Return (B)

Strong Boom                            0.15                -0.60              0.75

Weak Boom                              0.20               -0.30              0.50

Average                                     0.05               -0.10               0.15

Weak Recession                      0.40                0.20             -0.10

Strong Recession                    0.20                0.80             -0.55

 

(i) Which investment would a risk taker invest in and why?

(ii) Which investment would a risk averse investor choose and why?

(iii) Which investment would a rational investor choose and why?

(iv) Calculate and interpret the covariance between the rates of return.

(v) Calculate and interpret the correlation coefficient of the rates of return.

Answer rating: 100% (QA)

Answer i A risk taker would invest in investment B because it has the highest potential return in both the strong boom and weak boom scenarios Despite having a negative return in weak recession and st... View the full answer