you are considering two investment opportunities. for investment a there is a 25% chance that you lose…

you are considering two investment opportunities. for investment a there is a 25% chance that you lose $20,000, a 50% chance that you break even, and a 25% chance that you make $80,000. for investment b there is a 30% chance that you lose $50,000, a 50% chance that you break even, and a 20% chance that you make $180,000. based on the expected value of each, which investment should you make? the expected value of investment a is $15,000. the expected value of investment b is $

you are considering two investment opportunities. for investment a there is a 25% chance that you lose $20,000, a 50% chance that you break even, and a 25% chance that you make $80,000. for investment b there is a 30% chance that you lose $50,000, a 50% chance that you break even, and a 20% chance that you make $180,000. based on the expected value of each, which investment should you make? the expected value of investment a is $15,000. the expected value of investment b is $

Answer

Explanation:

Step1: Recall expected - value formula

The expected - value formula is $E(X)=\sum_{i}x_ip_i$, where $x_i$ are the possible outcomes and $p_i$ are their corresponding probabilities.

Step2: Calculate expected value of investment B

For investment B, when there is a loss, $x_1=- 50000$ with $p_1 = 0.3$; when break - even, $x_2 = 0$ with $p_2=0.5$; when make money, $x_3 = 180000$ with $p_3 = 0.2$. $E(B)=(-50000)\times0.3+0\times0.5 + 180000\times0.2$ $E(B)=-15000 + 0+36000$ $E(B)=21000$

Answer:

$21000$