Question

An investor, has recently acquired R100 000 in cash through the sale of a previously owned business. The investor made a profit of R1 000 000 from the sale of the business and has decided that he/she will invest R100 000 of the R1 000 000 in one of two investment opportunities, namely Investment 1 or Investment 2. The investor plans to use this investment as part of their retirement savings, noting that the investor plans to retire in 2 years time. The investor is debt free. - 3 - The investor has contracted Mr A. Analyst to assist with the probabilities of profit. Mr A. Analyst has taken all factors into consideration, and has reported back to the potential investor that following probabilities apply for Investment 1: (1) there is a 70% probability of achieving a profit of R50 000; (2) there is a 10% probability of achieving a profit of R10 000; and (3) there is a 20% probability of losing R20 000. For investment 2 the following applies: (1) there is a 60% probability of achieving a R40 000 profit; (2) there is a 20% probability of achieving a R30 000 profit, and (3) a 20% probability of losing R10 000. Mr A. Analyst however is not a registered financial advisor, and cannot advise the investor on which investment option he/she should take. The investor approaches Old Mutual for advise and asks for a report to be produced to, advising which option should be taken. Given that Old Mutual is known for presenting all options, your syndicates role is to produce a report in line with the guidelines above, to the investor advising which option is most optimal for the investor (expected profit, life-stage etc.).

1. Briefly explain the problem statement.

2. and write a conclusion that presents a strong conclusion to the case, which is succinct. Refers to key aspects consistently and key points are fully developed.

Answer 1

1.

THE GIVEN PROBLEM IS RELATED TO AN INVESTOR MR. A . HE HAS R 100000 TO INVEST FOR THEIR RETIREMENT SAVINGS AND GET TWO INVESTMENT PROPOSALS FROM AN ANALYST . EACH INVESTMENT HAS PROBABILITIES FOR PROFITS AND LOSSES . ALSO THE INVESTOR WANTS TO RETIRE IN 2 YEAR TIME.

2.

SO WE HAVE TWO INVESTMENT OPTIONS AND WE SHOULD EVALUATE IT ON VARIOUS PARAMETERS AS FOLLOWS:

INVESTMENT 1:

EXPECTED PROFIT

50000 *70% =35000

10000*10%=1000

-20000*20%=-4000

SO TOTAL EXPECTED PROFIT FROM INVESTMENT A IS 32000

INVESTMENT 2:

EXPECTED PROFIT

40000*60%=24000

30000*20%=6000

-10000*20%=-2000

SO TOTAL EXPECTED PROFIT FROM INVESTMENT B IS 28000

SO MR. A SHOULD CHOOSE INVESTMENT A AS IT IS PROVIDING HIGHER EXPECTED PROFIT AND HE SHOULD NOT BEAR RISK OF LOSING HIS MONEY IN RETIREMENT AGE.