If one investment can give you $1200 with a probability of .20 and you could lose $800 with a probability of .80, and another investment can give you $600 with a probability of .70 and a loss of $300 with a probability of .30, which investment is better?© BrainMass Inc. brainmass.com October 24, 2018, 6:41 pm ad1c9bdddf
This solution helps decide on the better investment based on expected values.
Risk Analysis in Investments
1) Graph and explain the risk profile for the following:
Risk Expected Return
2) Given the following two investment options, explain what an investor would choose and why:
Investment 1, an investment that is guaranteed a 6.5 percent return.
Investment 2, an investment that has a probability 0.25 of earning 5%, a 0.50 probability of earning 10%, and a 0.25 probability of earning 0%.
3) Explain which of the investments below are riskier and why:
4) For the class of investors below, explain which investment vehicle they are likely to choose based on its risk profile (stock, corporate bond, and Treasury bond):
A retiree that is looking for a safe investment
A 28-year-old MBA graduate looking for high returns
A forty-something professional looking for good investment income