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. 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

Explanation / Answer

let the return for Investment 1 in Scenario 1 be x so x*0.2 + 2000*0.3 - 5000*0.5 = 6000*0.2 + 4000*0.3 + 0 solving this we get x = 21500 so the return for investment 1 in scenario 1 should be $21500 to make indifference

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