Paul wants to choose one of the two investment opportunities over three possible

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 5.0 Points 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

Explanation / Answer

B. Investment 2 is the right answer the investment that maximizes Paul's Expected Money Value (EMV) = B. Investment 2 Paul's Expected Money Value (EMV) for Investment 1 = (10000)(0.2) +2000(0.3) + (-5000)(0.5) = 2000 + 600 - 2500 = $100 for Investment 2 = (6000)(0.2) + (4000)(0.3)+(0)(0.5) = 1200 + 1200 = $2400

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