anonymous
  • anonymous
Let's observe three distinct styles of investing $1000. The profits are evaluated in the following three ways: Style No. 1: $10 000 profit with probability 0.15 and $1000 loss with probability 0.85. Style No. 2. $1000 profit with probability 0.50 $500 profit with probability 0.30 and $500 loss with probability 0.20. Style No. 3: Guaranteed $400 profit. a) Which investment style has the best expected value? b) Which investment style has the greatest risk? c) Which metod would you prefer? Thank you for your input!
Mathematics
  • Stacey Warren - Expert brainly.com
Hey! We 've verified this expert answer for you, click below to unlock the details :)
SOLVED
At vero eos et accusamus et iusto odio dignissimos ducimus qui blanditiis praesentium voluptatum deleniti atque corrupti quos dolores et quas molestias excepturi sint occaecati cupiditate non provident, similique sunt in culpa qui officia deserunt mollitia animi, id est laborum et dolorum fuga. Et harum quidem rerum facilis est et expedita distinctio. Nam libero tempore, cum soluta nobis est eligendi optio cumque nihil impedit quo minus id quod maxime placeat facere possimus, omnis voluptas assumenda est, omnis dolor repellendus. Itaque earum rerum hic tenetur a sapiente delectus, ut aut reiciendis voluptatibus maiores alias consequatur aut perferendis doloribus asperiores repellat.
chestercat
  • chestercat
I got my questions answered at brainly.com in under 10 minutes. Go to brainly.com now for free help!
anonymous
  • anonymous
I'll take a crack at it. Just letting you know that i'm starting it (i saw your chat)
anonymous
  • anonymous
Thanks mate!
anonymous
  • anonymous
Expected value is a term for over the long run (as trials approaches infinity) what should the value end up being. The formula is: Expected value = Summation of: Gains(Probability) + Losses(Probability) Style 1 Expected Value: 10,000*.15 + (-1000)*.85 = 1500-850 = $650 net expected gain Style 2 EV = 1,000*.50 + 500*.3 + (-500)*.2 = $550 net expected gain Style 3 EV = $400 guaranteed profit A.) Style 1 has the highest (best) expected value B.) Look to the potential losses in the worse case scenario for each style of investment. Style 3 has 0 loss, so ignore it. Style 2 has a potential of $500 loss and Style1 has a potential of $1000 loss. So Style 1 has the greatest risk. C.) This is your own preference depending on your fiscal leanings. Some people are risky (Style 1), some people don't like risk at all (Style 3), and some are in between (Style 2) Pick whatever you want. I'd personally pick Style 3 and invest tons of money - > guaranteed profits. Can't lose. 40% investment return is huge. normally it's around 8%.

Looking for something else?

Not the answer you are looking for? Search for more explanations.

More answers

anonymous
  • anonymous
Thanks a ton for the thorough answer!
anonymous
  • anonymous
You're welcome. I'm procrastinating my calc homework :p
anonymous
  • anonymous
Lol I do that too :D

Looking for something else?

Not the answer you are looking for? Search for more explanations.