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# ps2 - 12 per year with a standard deviation of 20 However...

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1 B AYLOR U NIVERSITY H ANKAMER S CHOOL OF B USINESS D EPARTMENT OF F INANCE , I NSURANCE & R EAL E STATE Dr. Garven Name _____________________ Problem Set #2 Show your work and write as legibly as possible. Good luck! 1. Suppose you are offered a bet based upon the roll of three standard dice. These dice are fair, so for any given die, the odds of a specific number being rolled is 1/6. In order to participate in this bet, you must pay \$1 up front. You select a number from 1 to 6, and if this number comes up on all three dice, then the payoff is \$4. If this number comes up on two of the three dice, then the payoff is \$3. Finally, if your number comes up on only one of the dice, then the payoff is \$2. How much money can you expect to win or lose on average from playing this game? 2. Since 1926, the long-run average return on the S&P 500 stock market index has been
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Unformatted text preview: 12% per year, with a standard deviation of 20%. However, the consensus analyst forecast is that the standard deviation of the S&amp;amp;P 500 during 2010 will be 25%, and that the expected return on the S&amp;amp;P 500 will decline from 12% to 8%. A. What are the odds of a positive return on the S&amp;amp;P 500 stock market index during 2010 (assuming that returns on the S&amp;amp;P 500 index are normally distributed)? B. Suppose that analysts revise their forecasts so that the consensus 2010 forecast is that the S&amp;amp;P 500 will revert back to its long-run average return and standard deviation of 12% and 20% respectively. Under this scenario, what are the odds of a positive return on the S&amp;amp;P 500 stock market index during 2010?...
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