Answer:
c. $5,000 into each company
Explanation:
Let X be the actual (random) return from each share of XX, and Y be the actual return from each share of YY. Computing the returns from each option:
A) Investing $10,000 into XX
Given that variance = (standard deviation)²
Since XX cost $20 per share, only 500 shares can be bought.
Expected value = 500 * E(x) = 500 * 1 = 500
Variance = 500² * Var(x) = 500² * 0.5² = 62500
B) Investing $10,000 into YY
Since YY cost $50 per share, only 200 shares can be bought.
Expected value = 200 * E(y) = 200 * 2.5 = 500
Variance = 200² * Var(y) = 200² * 1² = 40000
C) Investing $5,000 into each company
Since XX cost $20 per share and YY cost $50 per share, only 250 shares of XX and 100 shares of YY can be bought.
Expected value = 250 * E(x) + 100 * E(y) = 250 * 1 + 100 * 2.5 = 500
Variance = 250² * Var(x) + 100² * Var(y) = 250² * 0.5² + 100² * 1 = 25625
Since all options have the same expected return, but option C has the lowest variance hence it is the least riskiest. So the best option is C
