A financial firm is considering two investment opportunities. A real estate inve

Question

A financial firm is considering two investment opportunities. A real estate investment would require a $3 million investment, and the experts at the firm predict that there is a 70% chance that the investment will yield $7 million in gross profits, a 20% chance that it will yield $4 million in gross profits, and a 10% chance that it will yield $0 in gross profits. A stocks and bonds investment would require a $4 million investment, and the firm’s experts predict that there is a 50% chance that this investment would yield gross profits of $12 million, a 30% chance that it would “break even” ($4 million in gross profits), and a 20% chance that it would yield $0 in gross profits. Find the expected value for each of these two investment opportunities.

Explanation / Answer

Profit of real estate = (70x7 + 20x4 + 10x0)/100 = $5.7million

Profit of stocks and bonds = (12x50 + 30x4 + 20x0)/100 = $7.2 million

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