1: Compute the expected return for each alternative. Based on their expected returns, would you rather invest your money in the stock market or in gold? Why?
Next, compute the standard deviation of the return associated with an investment in gold and the standard deviation of the return associated with an investment in the market.
2: Now, given their expected returns and the standard deviations of their returns, would you rather invest in gold or the stock market? Why?
Questions 1 and 2 above can be answered using the material in Chapter 5 of our textbook. This last question goes well beyond those topics and is a real challenge. Suppose that in addition to investing in gold or in the stock market you could invest in a portfolio consisting of a combination of gold and the market. In particular, suppose that you could invest in a portfolio made up of 40% stock and 60% gold.
Question #3: Which of the 3 options would you prefer-(1) invest in gold alone, (2) invest in the market alone. or (3) invest 40% in the market and 60% in gold? Why?