Assuming that yields for each stock are approximately normally distributed, with which investment strategy do you have the smallest chance of losing money?

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Invest $200 in stock A. Stock A costs $20 per share

Invest $200 in stock A. Stock A costs $20 per share

Question

You are choosing between the following investment strategies:

i. Invest $200 in stock A. Stock A costs $20 per share. Expected yield per share of stock A is $2, and the variance of yield per share is 9 ($-squared).

ii. Invest $200 in stock B. Stock B costs $10 per share. Expected yield per share of stock B is $.90, and the variance of yield per share is 1 ($-squared).

iii. Invest $100 in stock A and $100 in stock B. The correlation between yield per share of stock A and yield per share of stock B is .12.

a.Which investment strategy has the highest expected yield?

b. Assuming that yields for each stock are approximately normally distributed, with which investment strategy do you have the smallest chance of losing money?

Invest $200 in stock A. Stock A costs $20 per share

 

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