Question: [12 Marks]

1. The owner of a riverside retail store is trying to decide whether or not to take out flood insurance. According to local meteorologists, there is a 1% chance the river will flood within the next year. The store’s profits depend on whether the insurance is purchased and whether river floods. The profits, which includes the payment for the insurance premium, for the four possible combinations are in the following table.
   
   Compare the expected profits and standard deviation of profits for the store if they do not take out insurance against the expected profits if they do take out insurance. What course of action do you recommend the store takes?
2. A risk free asset X has a return of 25% and is independent of asset Y. Asset Y has an expected return of 35% with a standard deviation of 10%. Find the expected return and the standard deviation of the return on a portfolio consisting of 40% of asset X and 60% of asset Y.

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Deliverable: Word Document