Question

I have $5,000 and am weighing various options to save more for my sons’ college tuition. There are 4 different account options: direct portfolio, guaranteed interest, high risk stock, or do nothing. The guaranteed interest account has a return of $9,000. The direct portfolio has a 5% chance of returning $20,000 a 60% chance of returning $15,000, a 30% chance of returning $10,000, and a 5% chance of returning $4,000. The high risk stock has a 1% chance of returning $100,000 and a 99% chance of losing everything.

Answer 1

I would advice to invest on the direct portfolio as yield the better expected return with the current information.

Step-by-step explanation:

When an investment outcome can vary, we multiply the outcome by the probability:

direct portfolio

0.05 x 20,000 = 1,000

0.60 x 15,000 = 9,000

0.30 x 10,000 = 3,000

0.05 x 4,000 = 200

Expected return 13,200

HIgh risk stock

0.01 x 100,000 = 1,000

0.99 x 0 = 0

Expected return 1,000

For the other two option the retun is "safe"

do nothing: 5,000

guaranteed interest: 9,000

The best outcome will be of the direct portfolio as the expected return is higher than other option: 13,200