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Probability on return on investment - Choosing an investment

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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?

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Solution Summary

This solution helps decide on the better investment based on expected values.

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See Also This Related BrainMass Solution

Risk Analysis in Investments

1) Graph and explain the risk profile for the following:

Risk Expected Return
0.10 0.07
0.14 0.10
0.20 0.15
0.30 0.25

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:

Corporate stocks
Corporate bonds
Treasury bonds

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

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