lecture Notes 1B-Investment Mgt

# lecture Notes 1B-Investment Mgt - Lecture Notes 1B...

This preview shows pages 1–8. Sign up to view the full content.

Lecture Notes 1B Investment Management Gerry L. Suchanek

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
An Investment Choice Problem Consider the following investment options Option A: Invest \$1000 today and receive \$1100 after one year with certainty Option B: Invest \$1000 today and one year later toss a coin: If Heads, receive \$2000 If Tails, receive \$200
What are the expected rates of return Option A: (1100 - 1000)/1000 = 10% Option B: Expected payoff = 0.5(2000) + 0.5(200) = \$1100 Hence, Expected return = (1100 - 1000)/ 1000 = 10%

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Which option would you prefer?
Another set of choices Option A: Invest \$1000 today and receive \$1100 after one year with certainty Option B: Invest \$1000 today and one year later toss a coin: If Heads, receive \$2000 If Tails, receive \$400

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
What are the expected rates of return now? Option A: (1100 - 1000)/1000 = 10% Option B: Expected payoff = 0.5(2000) + 0.5(400) = \$1200 Hence, Expected return = (1200 - 1000)/ 1000 = 20%
Would you prefer option B

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 09/27/2010 for the course BUSINESS 6F:111 taught by Professor Tongyao during the Spring '09 term at University of Iowa.

### Page1 / 17

lecture Notes 1B-Investment Mgt - Lecture Notes 1B...

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online