Suppose you visit with a financial adviser, and you are considering investing some of your wealth in one of three investment portfolios: stocks, bonds, or commodities. Your financial adviser provides you with the following table, which gives the probabilities of possible returns from each investment:
Stocks Bonds Commodities
Probability Return Probability Return Probability Return
0.25 12% 0.6 10% 0.2 20%
0.25 10% 0.4 7.50% 0.25 12%
0.25 8% 0.25 6%
0.25 6% 0.25 4%
0.05 0%
A. Which investment should you choose to maximize your expected returns: Stock, Bonds, commodities?
B. If you are risk-averse and had to choose between the stock or the bond investments, you would choose, and why?