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Investment decision: a money market fund, a stock or gold

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Problem One of your friends has $ 2000.00 available to invest. Assume that all the
money must be placed in one of three investments; a money market fund, a
stock, or gold. Each dollar that your friend invests in the money market fund
earns a virtually guareanteed 12%. Each dollar that is invested in stock
earns an annual return characterized by the probability distribution provided.
Each dollar that is invested in gold earns an annual return characterized by
the probability distribution provide.

A) If your friend must place all the available funds in a single investment, which
investment should he choose to maximize his expected earnings of the next
year?

Investment data

Distribution of Annual Returns for Given Stock
Return Probability
0.00 0.10
0.06 0.20
0.12 0.40
0.18 0.20
0.24 0.10

Distribution of Annual Returns for Gold
Return Probability
-0.36 0.10
-0.12 0.20
0.12 0.40
0.36 0.20
0.60 0.10

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Solution Summary

This problem explains how to take single investment decisions when there are different alternatives available.

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Problem One of your friends has $ 2000.00 available to invest. Assume that all the
money must be placed in one of three investments; a money market fund, a
stock, or gold. Each dollar that your friend invests in the money market fund
earns a virtually guaranteed 12%. Each dollar that is invested in stock
earns an annual return characterized by the probability distribution provided.
Each dollar that is invested in ...

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