Question

You are considering two investment opportunities. For investment A there is a 25% chance that you lose $20,000, a 50% chance that you break even, and a 25% chance that you make $80,000. For investment B there is a 30% chance that you lose $50,000, a 50% chance that you break even, and a 20% chance that you make $180,000. Based on the expected value of each, which investment should you make?

Answer 1

For investment A - $15,000

For investment B - $21,000

So you can gain more by $6,000 if you choose investment B.

Explanation:

Answer 2

The answer is investment B.

Solution:
For investment A - the expected value of the investment is
($20,000) * 25% = ($5,000)
$80,000 * 25% = $20,000
$15,000

For investment B - the expected value of the investment is
($50,000) * 30% = ($15,000)
$180,000 * 20% = $36,000
$21,000

So you can gain more by $6,000 if you choose investment B.