Consider the Following Discrete Probability Distributions of Payoffs for 3

Consider the following discrete probability distributions of payoffs for 3 securities that are held in a DI's trading portfolio (payoff amounts shown are in $millions) : $$\begin{array} { | l | l | l | } \hline \text { SECURITY } & \text { PROBABILITY } & \text { PAYOFF } \\\hline \text { Alpha } & 0.50 & 355 \\\hline & 0.49 & 150 \\\hline & 0.01 & - 300 \\\hline\end{array}$$ $$\begin{array} { | l | l | l | } \hline \text { SECURITY } & \text { PROBABILITY } & \text { PAYOFF } \\\hline \text { Beta } & 0.50 & 400 \\\hline & 0.49 & 150 \\\hline & 0.0025 & - 300 \\\hline & 0.0075 & - 3,300 \\\hline\end{array}$$ $$\begin{array} { | l | l | l | } \hline \text { SECURITY } & \text { PROBABILITY } & \text { PAYOFF } \\\hline \text { Gamma } & 0.49 & 400 \\\hline & 0.49 & 150 \\\hline & 0.01 & - 150 \\\hline & 0.01 & - 2,000 \\\hline\end{array}$$
-Based on your answers to the previous three question, which of the following is true?

A) Security Alpha represents the riskier of the two assets in the trading portfolio because there is a one-percent probability of loss the following day.
B) Both securities have the same expected payoff; therefore, it makes no difference which is in the trading portfolio.
C) Security Beta is the better asset to have in the trading portfolio since there is a 50 percent probability of a $400 payoff versus only $355 with security Alpha.
D) Both securities have the same expected payoff and value at risk (VAR) , therefore it makes no difference which is in the trading portfolio.
E) According to the expected shortfall measure, if tomorrow is a bad trading day, losses will exceed $25 million.

Correct Answer:

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