Question

You have $100,000 that you must invest and you can invest this money in three assets: Acme common stock, Gamma common stock, and the risk free asset. You can borrow and lend at the risk free rate. The expected returns and the standard deviations for each of these assets are provided in the table below:

	Expected Return	Standard Deviation
Acme common stock	7%	15%
Gamma common stock	20%	40%
Risk Free Asset	4%	0%
Correlation between the returns of Acme and Gamma: 0.00

True or False (choose one): You will not invest any of your money in Acme common stock.

Briefly explain your answer here:

Answer 1

True we wont invest any of money in acme common stock it is better to invest in risk free asset.

The expected return on an investment is the expected value of the probability distribution of possible returns it can provide to investors. The return on the investment is an unknown variable that has different values associated with different probabilities.

Standard deviation is a measure of risk that an investment will not meet the expected return in a given period. The smaller an investment's standard deviation, the less volatile (and hence risky) it is. The larger the standard deviation, the more dispersed those returns are and thus the riskier the investment is. so risk free asset is at 4% with no risk of standard deviation. Acme common stock is offering 7% having risk of 15% standard deviation.