Problem 2 A venture capitalist, willing to invest $5,000,000 $1,000,000 , has th

Question

Problem 2 A venture capitalist, willing to invest $5,000,000 $1,000,000 , has three investments to choose from. profit a The first investment, a software company, has a profit, and a 60% $1000,000 chance of returning 5% chance of returning $3,000,000 35% chance of osing the dollars. The second investment, a hardware company, has a 15% chance of returning $4,000,000 profit, a 15% chance of returning $3,000,000 profit, and a 70% chance of losing the $1,000,000 dollars. The third investment, a biotech company, has a 10% chance ofreturning $4,000,000 profit, a 60% chance of returning $3,000,000 profit, anda 30% chance of losing the 1,00 DOC dollars. Let X, be the return on investment 1, X2 be the return on investment 2, and X3 be the return on investment 3. Enter all responses as integers or decimal values accurate to the nearest 0.01 a. Complete the three PDFs below. ENTER LOSSES AS NEGATIVE VALUES! PDF #1 PDF #2 PDF #3 P(X1 = x) P(X2 = x) POG =x) b. Determine the expected values of the three investment possibilities. C. Which is the safest investment (has the lowest probability of of losing money?pick one) d. Which is the riskiest investment (has the ighest probability of of losing money)? (pick one) e. Which investment has the highest expected return (on average)? | (pick one)

Explanation / Answer

Expectation is calculated as Probability of Winning 1* Amount1 +Probability of Winning2*Amount 2+Probability of Loosing3*Amount Lost3

c) Safest investment is the Investment 3 as it's probability of loosing is 30% which is lowest compared to other investment 1 and 2

d) The riskiest investment is Investment 2 as it has 70% chances of loosing money

e) Highest expected return is that for Investment 1 which is $ 2,800,000

x P(x1=x) x P(x2=x) x P(x3=x) $          5,000,000 60% $   4,000,000 15% $   4,000,000 10% $          3,000,000 5% $   3,000,000 15% $   3,000,000 60% $       (1,000,000) 35% $ (1,000,000) 70% $ (1,000,000) 30% E(x1) $ 2,800,000 E(x2) $ 350,000 E(x3) $ 1,900,000

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