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Risk-Return Tradeoff The return on bonds is 8%. The return on stocks have a 60% chance...

  1. Risk-Return Tradeoff The return on bonds is 8%. The return on stocks have a 60% chance of having returns of 20% and a 40% chance of returns being 0%.
    1. What is the average return of holding stock?
    2. Using S as the share of wealth in stocks, what is the average return on wealth? Calculate the average return on wealth if s = 0, s = 0.5, and s = 1.
    3. Draw the risk-return trade-off.
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