If you invest $100 now in firm A, in one year you will get back $(30 + T), where T is the average temperature during the next summer. If you invest $100 now in firm B, in one year you will get back $(180 - T). The expected value of T is 70 and the standard deviation of T is 10.
a. Draw a graph showing the combinations of expected return and standard deviation that you can have by dividing $100 between stock in A and stock in B. (Hint: Expected value has the property that E(ax + b) = aE(x) + b and standard deviation has the property that SD(ax + b) = [(absolute value of a) times SD(x)] +b).
b. What is the expected value and standard deviation of the safest investment strategy you can make by this means?
c. What is the highest expected value you can achieve?

Question

Quizplus · Accepted Answer

The Answer of If you invest $100 now in firm A, in one year you will get back $(30 + T), where T is the average temperature during the next summer. If you invest $100 now in firm B, in one year you will get back $(180 - T). The expected value of T is 70 and the standard deviation of T is 10.
a. Draw a graph showing the combinations of expected return and standard deviation that you can have by dividing $100 between stock in A and stock in B. (Hint: Expected value has the property that E(ax + b) = aE(x) + b and standard deviation has the property that SD(ax + b) = [(absolute value of a) times SD(x)] +b).
b. What is the expected value and standard deviation of the safest investment strategy you can make by this means?
c. What is the highest expected value you can achieve?

If You Invest $100 Now in Firm A, in One