Question 24 of 50 8.0 P Tom has two options to invest into his friend\'s busines

Question

Question 24 of 50 8.0 P Tom has two options to invest into his friend's business or to buy a CD (Certificate of deposit), If the business is successful he will earn 10% in it, otherwise he gains 0%. The guaranteed rate of return on the CD is 5%. Does it mean Tom is risk-averse if he chooses to invest in the business? o A. Yes, because the rate of return on business investment is higher than the rate of return on CD O B. Yes, because the expected rate of return is the same. Oc. No, because the expected rate of return is same for both options but the risk is higher for the business investment OD. No, because the rate of return on business investment is higher than the rate of return on CD Reset Selection

Explanation / Answer

CALCULATION OF THE EXPECTED RETURN FROM THE INVESTMENT IN BUSINESS Return 10% 0% Probability 50% 50% Expected Retunr (Return X Probability) 5.00% 0.00% Total 5.00% Return from the investment in CD is also 5% , Means return from the CD and expecrted return from the business is the same but the risk of the 0% return is involved in the business if the business will not succes. So, Answer = Option C = No, Because the expected return is the same from the both option but                                                   risk is the heigher for the business investment.

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