courses.aplia.com :Course Reading when do you use handhe Home I Chegg.comm 4. Di
ID: 2806511 • Letter: C
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courses.aplia.com :Course Reading when do you use handhe Home I Chegg.comm 4. Diversification Aa Aa Bette is considering two investment strategies. The first strategy involves putting all of her available funds in Proje A. If Project A succeeds, she will receive a $10,000 return, and if it fails, she will suffer a $2,000 loss. There is a 7 chance Project A will succeed and a 30% chance it will fail. The second strategy involves diversification: investing half of her funds in Project A and half of her funds in Project (which has the same payoff structure as Project A). If both projects succeed, she will receive a $5,000 return from Project A and a $5,000 return from Project .If both projects fail, she will suffer a $1,000 loss on Project A and a $1,000 loss on Project B, for a net los .If one project succeeds and one fails, she will receive a $5,000 return from the successful project and will B, for a net gain of $10,000. of $2,000. suffer a $1,000 loss on the failed project, for a net gain of $4,000. As with Project A, there is a 70% chance that Project B will succeed and a 30% chance that it will fail. Assume that the outcomes of Project A and Project B are independent. That is, the successfailure of Project A has nothing to d with the success or failure of Project B. The expected payoff from the first strategy (investing everything in Project A) is Suppose Bette chooses the second strategy, which is putting half of her funds in Project A and half into Project B. The probability that both projects will succeed is and the probability that one project will fail and one project will succeed is , the probability that both projects will fail is The first strategy (investing everything in Project A) offers Bette an expected payoff that is expected payoff from the second strategy (investing haif in each project). the The probability of losing $2,000 is the second strategy (invest half in each project) under the first strategy (invest everything in Project A) than underExplanation / Answer
A. The expected payoff from strategy A= 10000*0.7 - 2000*0.3= 6400$
B. Probablity that both project will succeed = 0.7*0.7= 0.49
Probablity that both project will fail = 0.3*0.3= 0.09
Probablity that one will succeed and one will fail = 0.7*0.3= 0.2
C. Expected payoff in second strategy= 6400*0.5 + 6400*0.5= 6400$, so that is equal to the expected payoff from 1st strategy.
D. The probablity of loosing 2000 is less under strategy 2.
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