Final answer:
The expected return of a portfolio can be calculated by multiplying the probability of each potential return by its corresponding outcome and summing the products. The venture capitalist has three investments to choose from: a software company, a hardware company, and a biotech firm. The investment with the highest expected return can be identified based on the calculated values.
Step-by-step explanation:
The expected return of a portfolio is calculated by multiplying the probability of each potential return by its corresponding outcome, and then summing the products. In this case, the venture capitalist has three investments to choose from: a software company, a hardware company, and a biotech firm. Each investment has different probabilities of returns and losses.
The expected return can be calculated by multiplying the probability of each potential return by the corresponding outcome and then summing the products. For example, for the software company, the expected return can be calculated as:
Expected return = Probability of $5,000,000 return × $5,000,000 + Probability of $1,000,000 return × $1,000,000 + Probability of losing $1,000,000 × -1,000,000
Similarly, the expected return can be calculated for the hardware and biotech companies.
Based on the calculated expected returns, the investment with the highest expected return, on average, can be determined.