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 (i.e. the two investments would have the same EMV.)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

Answer 1

Answer:

1. $2,400

2. Investment 2

Explanation:

For computing the expected return for the investment 2, we have to apply the formula which is shown below:

=  Probability for Scenario 1 × return in Scenario 1 + Probability for Scenario 2 × return in Scenario 2 + Probability for Scenario 3 × return in Scenario 3

= 0.2 × $6,000 + 0.3 × $4,000 + 0.5 × 0

= $1,200 + $1,200

= $2,400

From the calculations we use the investment 2 as Paul is uncertain about the return for investment 1