There are three investment plans for your consideration. Each plancalls for an i

Question

There are three investment plans for your consideration. Each plancalls for an investment of $25,000 and the return will be one yearlater. Plan A will return $27,500. Plan B will return $27,000 or$28,000 with probabilities 0.4 and 0.6, respectively. Plan C willreturn $24,000, $27,000, or $33,000 with probabilities 0.2, 0.5,and 0.3, respectively. If your objective is to maximize theexpected return, which plan should you choose? Are thereconsiderations that might be relevant other than simply theexpected values?

Explanation / Answer

There are threeinvestment plans for your consideration. Each plan calls for aninvestment of $25,000 and the return will be one year later. Plan Awill return $27,500. Plan B will return $27,000 or $28,000 withprobabilities 0.4 and 0.6, respectively. Plan C will return$24,000, $27,000, or $33,000 with probabilities 0.2, 0.5, and 0.3,respectively. If your objective is to maximize the expected return,which plan should you choose? Are there considerations that mightbe relevant other than simply the expectedvalues? {ExpectedReturn From Plan "A"} = (1.0)*(27500) = 27500 {Expected Return From Plan"B"} = (0.4)*(27000) +(0.6)*(28000) = 27600 {Expected Return From Plan"C"} = (0.2)*(24000) +(0.5)*(27000) + (0.3)*(33000) = 28200 SOLUTION ---->   {Plan "C" ProvidesMaximum Return} .

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.