Asked by Shelby Buckler on May 10, 2024
Verified
You can either invest in project A or B.Project A could have a value of $100 with a probability of 0.1 or a value of $75 with probability 0.9.Project B could have a value of $110 with probability 0.2 or a value of $70 with a probability of 0.8.Which project should you invest in?
A) Project A
B) Project B
C) Neither of the projects
D) You cannot tell from the information presented
Invest
To distribute funds or resources in anticipation of earning profits or income.
Probability
The quantification of an event's probability as a numerical value ranging from 0 to 1, indicating how likely it is to happen.
- Compare and make decisions between different investment projects based on expected value calculations.
Verified Answer
RH
Rebecca Hilton
May 17, 2024
Final Answer :
B
Explanation :
To determine the expected value of each project, we calculate the weighted average of the possible outcomes:
- Expected value of project A = (0.1 x $100) + (0.9 x $75) = $82.50
- Expected value of project B = (0.2 x $110) + (0.8 x $70) = $78.00
Since project B has a lower expected value than project A, it would be better to invest in project A.
- Expected value of project A = (0.1 x $100) + (0.9 x $75) = $82.50
- Expected value of project B = (0.2 x $110) + (0.8 x $70) = $78.00
Since project B has a lower expected value than project A, it would be better to invest in project A.
Learning Objectives
- Compare and make decisions between different investment projects based on expected value calculations.