(Scenario: Diversification) Use Scenario: Diversification.If Morris invests all of his money in the rain poncho company,what is his expected gain or loss? Scenario: Diversification
Morris is considering investing $10,000 in a sunglass company or a rain poncho company.If it is a rainy year and he invests only in the sunglass company,he will lose $5,000.However,if it is a rainy year and he invests only in the rain poncho company,he will earn $10,000.If it is a sunny year and he invests only in the sunglass company,he will earn $10,000;if he invests only in the rain poncho company,he will lose $5,000 in a sunny year.There is a 50% chance of a sunny year and a 50% chance of a rainy year.

A) a loss of $2,500
B) to break even
C) a gain of $2,500
D) a gain of $10,000

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Samantha Solis · Accepted Answer

Final Answer : C, Explanation :  If Morris invests all of his money in the rain poncho company, his expected gain would be:0.5 * $10,000 (sunny year gain) - 0.5 * $5,000 (rainy year loss) = $2,500Therefore, the best choice would be to invest all his money in the rain poncho company to gain $2,500. This is because investing in the sunglass company would result in a potential loss of $5,000 if it is a rainy year. By diversifying his investment, he could mitigate the risks associated with investing in a single company.

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