A venture capitalist, willing to invest $1,000,000, has three investments to cho

Question

A venture capitalist, willing to invest $1,000,000, has three investments to choose from. The first investment, a software company, has a 10% chance of returning $5,000,000 profit, a 30% chance of returning $1,000,000 profit, and a 60% chance of losing the million dollars. The second company, a hardware company, has a 20% chance of returning $3,000,000 profit, a 40% chance of returning $1,000,000 profit, and a 40% chance of losing the million dollars. The third company, a biotech firm, has a 10% chance of returning $6,000,000 profit, a 70% of no profit or loss, and a 20% chance of losing the million dollars.

Which one is the safest investment? Why do you think so?

Which one is the riskiest investment? Why do you think so?

Hint: Risk is measured by variance, higher the variance bigger the risk.

iv) Which investment has the highest expected return, on average?

We are having the hardest time finding the variance. This question is posted elsewhere but does not address variance, so I assume our answer may be different based upon that metric.

Explanation / Answer

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1) Safest investment is the one which has least variance

Hence second company is the safest.

2 ) Variance = E(X^2)_mean^2 is

As variance is highest in III company it is the one having mmaximum risk

3) Highest return is second company

I Return 5000000 1000000 -1000000 Prob 0.1 0.3 0.6 Return*p 500000 300000 -600000 200000 Expected return 200000

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