Question: Why is it important to be able to quantify risk? Compute the expected value of a $1,000 investment over the coming year. If you invest

  1. Why is it important to be able to quantify risk?
  2. Compute the expected value of a $1,000 investment over the coming year. If you invest $1,000 today, how much money do you expect to have next year? What is the percentage expected rate of return?
  3. Car insurance companies sell a large number of policies. Explain how this practice minimizes their risk?
  4. Mortgages increase the risk faced by homeowners. Explain how? What happens to the homeowner's risk as the down payment on the house rises from 10% to 15%.
  5. Consider two possible investments whose payoffs are completely independent of one another. Both investments have the same expected value and standard deviation. If you have $1,000 to invest, explain why you would benefit from dividing your funds between these investments.

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