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 revenue, a 20% chance that it will yield $4 million in gross revenue, and a 10% chance that it will yield $0 in gross revenue. 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 revenue of $12 million, a 30% chance that it would "break even” ($4 million in gross revenue), and a 20% chance that it would yield $0 in gross revenue. Find the expected value for each of these two investment opportunities. a. O real estate: $5.4 million; stocks and b. O bonds: $6.4 million c. O real estate: $5.7 million; stocks and d.o real estate: $2.7 million; stocks and bonds: $7.2 million bonds: $3.2 million NEYT OLISTI

Answer 1

Solution:

The expected value for real estate is:

xP(x) P(x) 0.7 0.2 7-3 = 4 4-3 = 1 0-3 = -3 2.8 0.2 0.1 -0.3 xP(x) = 2.7 :: Expected value of real estate = xP(x) = $2.7 million

х XP(x) P(x) 0.5 0.3 12-4= 8 4-4 = 0 0-4 = -4 4 0 0.2 -0.8 XxP(x) = 3.2 .. Expected value of the stocks and bonds = xP(x) = $3.2 million

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 revenue, a 20% chance that it will yield $4 million in gross revenue, and a 10% chance that it will yield $0 in gross revenue. 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 revenue of $12 million, a 30% chance that it would "break even” ($4 million in gross revenue), and a 20% chance that it would yield $0 in gross revenue. Find the expected value for each of these two investment opportunities. a. O real estate: $5.4 million; stocks and b. O bonds: $6.4 million c. O real estate: $5.7 million; stocks and d. real estate: $2.7 million; stocks and bonds: $7.2 million bonds: $3.2 million NEYT NIIETIL