Paul wants to choose one of the two investment opportunities over three possible
ID: 2648952 • Letter: P
Question
Paul wants to choose one of the two investment opportunities over three possible scenarios. Investment 1 will yield a return of $10,000 in Scenario 1, $2,000 in Scenario 2, and a negative return of -$5,000 in Scenario 3. Investment 2 will yield a return of $6,000 in Scenario 1, $4,000 in Scenario 2, and zero in Scenario 3. The probability for Scenario 1 is 0.2, for Scenario 2 is 0.3, and for Scenario 3 is 0.5.
Question 1 of 2
Question 2 of 2
If Paul is uncertain about the return for Investment 1 in Scenario 1, then this return has to be ???? dollars in order to make Paul indifferent between these two investments (i.e. the two investments would have the same EMV.) (Please only enter an integer and include no units.)
Question 1 of 2
If you were to choose the investment that maximizes Paul's Expected Money Value (EMV), then you should choose __________. A.Investment 1 B.Investment 2 C.Indifferent Reset SelectionQuestion 2 of 2
If Paul is uncertain about the return for Investment 1 in Scenario 1, then this return has to be ???? dollars in order to make Paul indifferent between these two investments (i.e. the two investments would have the same EMV.) (Please only enter an integer and include no units.)
Explanation / Answer
Particulars Scenario1 Scenario2 Scenario3 Total Investment1 10,000.00 2,000.00 (5,000.00) Probability 0.20 0.30 0.50 Expected return 2,000.00 600.00 (2,500.00) 100.00 Investment2 6,000.00 4,000.00 - Probability 0.20 0.30 0.50 Expected return 1,200.00 1,200.00 - 2,400.00 Investment 2 should be chosen Paul has to earn 2300 (2400-100) more to be indifferent about investment 1 Expected return on investment should be 2000 + 2300 = 4300 Return on invt should be 4300/.20 = 21500 Particulars Scenario1 Scenario2 Scenario3 Total Investment1 21,500.00 2,000.00 (5,000.00) Probability 0.20 0.30 0.50 Expected return 4,300.00 600.00 (2,500.00) 2,400.00