Consider three alternative bonds that you might invest in, each of which matures in one year. The following table shows the probability that you will receive each possible return. For example, if you buy bond A, the probability is 90 percent that your ret

Bond

Probability

Return

Bond A

90%

    20%

10%

-100%

Bond B

75%

    40%

25%

  -40%

Bond C

60%

    10%

40%

  -10%

a.

Calculate the expected return for all three bonds in percentage terms.

b.

The standard deviations of the returns on these bonds are: Bond A, 36.0 percent; Bond B, 34.6 percent; Bond C, 9.8 percent. If you are extremely risk averse, which of the three bonds would you buy? Why?

c.

Would a risk-averse investor ever buy Bond A instead of one of the other bonds? Why or why not?

Explain and show all your work. In your calculations, you may round after three significant digits.