. An investment firm is considering two alternative investments, A and B, under

Question

. An investment firm is considering two alternative investments, A and B, under two possible future sets of economic conditions good and poor. There is a .60 probability of good economic conditions occurring and a .40 probability of poor economic conditions occurring. The expected gains and losses under each economic type of conditions are shown in the following table:

Investment Economic Conditions

Using the expected value of each investment alternative, determine which should be selected.

Good Poor A. $380,000 -$100,000 B. $130,000 $85,000

Explanation / Answer

Alternative A is better

Good Poor Good Probability Bad Probability Total A. $380,000 ($100,000) 228000 -40000 188000 B. $130,000 $85,000 78000 34000 112000

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