You have $1,000 to invest and are considering buying some combination of the shares of two companies, DonkeyInc and Elep

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You have $1,000 to invest and are considering buying somecombination of the shares of two companies, DonkeyInc andElephantInc. Shares of DonkeyInc will pay a return of 12percent if the Democrats are elected, an event you believe to havea 40 percent probability; otherwise the shares pay a zero return.Shares of ElephantInc will pay 10 percent if the Republicans areelected (a probability of 60 percent), zero otherwise. Eitherthe Democrats or the Republicans will be elected.
Instructions: Enter your response aspercentage rounded to one decimal place.
a. If your only concern is maximizing your average expected return,with no regard for risk, you should invest your $1,000in (Click toselect) ElephantInc. DonkeyInc. andyour expected return will be %.
b. What is your expected return if you invest $500 in eachstock? (Hint: Consider what your return will be ifthe Democrats win and if the Republicans win, then weight eachoutcome by the probability that event occurs.)Instructions: Enter your response aspercentage rounded to two decimal places.Expected rate of return: %
c. The strategy of investing $500 in each stockdoes not give the highest possible averageexpected return. You would:
multiple choice 2
choose it anyway because the lower return is compensated by thisstrategy being less risky, as you receive a reasonable return nomatter which party wins.
not choose it because a less risky strategy cannot compensatefor a lower expected return.
not choose it because you should always choose the strategy withthe highest average expected return.
choose it anyway because this strategy guarantees the samereturn regardless of which party wins.
d. Devise an investment strategy that is riskless, that is,one in which the return on your $1,000 does not depend at all onwhich party wins.Instructions: Enter yourresponses rounded to two decimal places.You should invest $ in ElephantIncand $ in DonkeyInc.
e. Using the investment strategy devised in part d, youwill earn % regardless of which party wins.