Paul wants to choose one of the two investment opportunities over three possible
ID: 2790801 • 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.
Part 1) 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
Part 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
EMV = sum of (Prob. X Scenario return )
S=Scenario I = Investment S1 S2 S3 EMV Prob. 0.2 0.3 0.5 I1 10000 2000 -5000 100 I2 6000 4000 0 2400 Paul should choose I 2 , More EMV To be indifferent = Emv I1 = Emv I2 Let Return of I1 in S1 be x = 0.2X + (2000*0.3)+(-5000*0.5) = 2400 X = (2400 - 600 + 2500)/0.2 X = 21500 Please provide feedback.. Thanks in advance.. :-)