A venture capitalist, willing to invest $1,000,000, has three investments to choose from. The first investment, a software company, has a 15% chance of returning $8,000,000 profit, a 21% chance of returning $2,500,000 profit, and a 64% chance of losing the million dollars. The second company, a hardware company, has a 16% chance of returning $4,000,000 profit, a 24% chance of returning $1,500,000 profit, and a 60% chance of losing the million dollars. The third company, a biotech firm, has a 6% chance of returning $7,000,000 profit, a 33% of no profit or loss, and a 61% chance of losing the million dollars. Order the expected values from smallest to largest. first, second, third second, first, third second, third, first first, third, second third, first, second third, second, first
Answer :
Software :
Particulars | Profit | P | Expected value |
Software | 8,000,000 |
15% =0.15 |
=8,000,000 * 0.15 =1,200,000 |
2,500,000 | 0.21 | 5,25,000 | |
-,1,000,000 | 0.64 | -640,000 | |
Total |
= 1,200,000 + 5,25,000 - 640,000 =$ 1,085,000 |
Hardware :
Particulars | Profit | P | Expected value |
Software | 4,000,000 |
16% =0.16 |
=4,000,000 * 0.16 =640,000 |
1,500,000 | 0.60 | 900,000 | |
-,1,000,000 | 0.06 | -60,000 | |
Total |
= 640,000 + 900,000 - 60,000 =$ 1,480,000 |
Biotech :
Particulars | Profit | P | Expected value |
Software | 7,000,000 |
61% =0.61 |
=7,000,000 * 0.61 =4,270,000 |
0 | 0.33 | 0 | |
-,1,000,000 | 0.61 | -610,000 | |
Total |
= 1,200,000 + 5,25,000 - 610,000 =$ 1,115,000 |
Therefore,
Order of expected value from smallest to largest is :
software smallest expected value = 1,085,000
Next Biotech = 1,115,000
Largest value hardware = 1,480,000
A venture capitalist, willing to invest $1,000,000, has three investments to choose from. The fir...