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Mark is trying to decide how to invest $10 000 for a minimum 5 year period.  ...

Mark is trying to decide how to invest $10 000 for a minimum 5 year period.   He is choosing between a safe low yield investment and a risky high yield investment. Investment A has a 70% chance of making 20% on his original investment over the next 5 years(so, it has a chance of being worth $12 000 at the end of the 5 year period), 25% of making 10% and 5% of making 5% on his money. Investment B has a 35% chance of making 40% on his original investment over the next 5 years a 35% of making 20% and a 30% chance of losing his money. (Provide an explanation)

Math   Statistics-And-Probability   
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Answer #1

We will take the decision to choose the investment A or B on the basis of the expected values of the final value of investment after five years. The calculations are shown in the following tables, the formula to calculate the expected value is:

Investment A:
Profit % Probability (Pi) Final Investment Value (Xi) Pi*Xi
20% 0.7 12000 8400
10% 0.25 11000 2750
5% 0.05 10500 525
Expected Value 11675
Investment B:
Profit % Probability (Pi) Final Investment Pi*Xi
40% 0.35 14000 4900
20% 0.35 12000 4200
-100% 0.3 0 0
Expected Value 9100

As the expected value of the investment after five years for investment A is more than B (11675 > 9100), we will choose investment A

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