M & B 4th Edition by Dean Croushore

Exercise 5

Julia is considering buying stock in only one of the following companies: (i) Uninvest.com, which runs a Web site geared toward older people's retirement income and has a 10 percent probability of returning 20 percent this year and a 90 percent probability of returning 7 percent, or (ii) Speculate, Inc., which invests in derivative securities and has a 50 percent chance of returning 0 percent this year and a 50 percent chance of returning 50 percent.
a What are the expected returns to investing in Uninvest and Speculate?
b What are the standard deviations of the returns to Uninvest and Speculate?
c If Julia is very risk-averse, which company's stock should she buy?
d If Julia is risk-neutral (that is, she does not worry about risk at all), which company's stock should she buy?