lecture Notes 1B-Investment Mgt

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

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Lecture Notes 1B Investment Management Gerry L. Suchanek
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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
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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%
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Which option would you prefer?
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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
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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%
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Would you prefer option B
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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.

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

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