Paul wants to choose one of the two investment opportunities over three possible
ID: 2701253 • 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 2 of 2 5.0 Points 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
EMV of investment 1 = 10000 * 0.2 + 2000 * 0.3 + (-5000) * 0.5 = 2000+600-25000=100
EMV of investment 2 = (6000)(0.2) + (4000)(0.3)+(0)(0.5) = 1200 + 1200 = 2400
As paul is uncertain for investment1, then return should be equal to investment2 =$2400
ans:$2400