You have been out of school and gainfully employed for 5 years. You have three a

Question

You have been out of school and gainfully employed for 5 years. You have three alternatives available for investment with your own money. Each has some element of risk, although some are safer than others. Following is a summary of the alternatives, the risks, and the returns:

Alternative

You Invest

Chance of
Success

Returned to You
If Success

Chance of
Failure

Returned to You
If Failure

Alternative

You Invest

Chance of
Success

Returned to You
If Success

Chance of
Failure

Returned to You
If Failure

A $100 95% $110.79 5% $95.00 B $100 60% $150.00 40% $50.00 C $100 20% $510.00 80% $10.00

Explanation / Answer

a)sucess=0.95

profit=10.79

loss=5

Risk=0.05*5=0.25

Rp=0.95*10.79=10.25

Rfactor=0.25/10.25=0.0243

b)sucess=0.6 profit=50

loss=50

RiskL=0.4*50=20

Rp=0.6*50=30

Rfactor=20/30=0.66

c)sucess=0.2 profit=410

loss=90

Risk=90*0.8=72

Rp=410*0.2=82

Rfactor=72/82=0.878

option A has low risk factor, so opting A is safe

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