You have $5000 to invest. Two options: (1) 67% chance of making a return of $1000 or getting nothing. (2) 50% chance of making $300 and 50% mking $700?
To make a decision between the two investment options, we need to calculate the expected return for each option and assess the risk involved.
Option 1:
- There is a 67% chance of making a return of $1000.
- There is a 33% chance of getting nothing.
To calculate the expected return for option 1, we perform the following calculation:
(0.67 * $1000) + (0.33 * $0) = $670
Option 2:
- There is a 50% chance of making $300.
- There is a 50% chance of making $700.
To calculate the expected return for option 2, we perform the following calculation:
(0.5 * $300) + (0.5 * $700) = $500
Comparing the expected returns, option 1 has an expected return of $670, while option 2 has an expected return of $500.
However, it is important to consider the risk associated with each option. Option 1 has a higher risk since there is a possibility of receiving nothing. Option 2 offers a more balanced distribution of returns.
Ultimately, the decision depends on your risk tolerance and investment goals. If you prioritize minimizing risk, option 2 may be more suitable. If you are comfortable with higher risk and potentially higher returns, option 1 could be a consideration.
To decide between the two investment options, you need to evaluate their expected returns. To calculate the expected return, you multiply the probability of each outcome by the corresponding return and sum them up.
Let's start with option 1, where there is a 67% chance of making $1000 and a 33% chance of getting nothing.
Expected return for option 1 = (67% * $1000) + (33% * $0) = $670 + $0 = $670.
Now, let's move to option 2, where there is a 50% chance of making $300 and a 50% chance of making $700.
Expected return for option 2 = (50% * $300) + (50% * $700) = $150 + $350 = $500.
Comparing the expected returns:
- Option 1 has an expected return of $670.
- Option 2 has an expected return of $500.
Based on the expected returns, option 1 seems to be the better choice as it offers a higher expected return. However, it's important to note that this decision is based solely on expected values and does not consider factors such as risk tolerance, potential loss, or other investment objectives you may have. You should assess your personal circumstances and risk appetite before making any investment decisions.