Question

Please Answer ASAP

Jean wants to invest a gift of $4,250 in the stock market. A broker suggests two companies, Solar Solutions (SOLR) and Frontline Medical (FLMD). He provides the probabilities for an annual return on $4,250 based on their historical gains: SOLR: 50% chance of $1,000 gain, 35% chance of $200 gain, 15% chance of $600 loss FLMD: 80% chance of $750 gain, 20% chance of $100 loss Which is the best analysis of these investments?

A. Frontline Medical Is the better Investment because its expected annual return is $580 greater than Solar Solution's

B. Frontiine Medical has the hlgher risk of loss, but it is likely the better Investment over time, because the annual expected return Is $100 greater than Solar Solution's

C. Solar Solutions is the better Investment because its expected annual return is $950 greater than Frontline Medical's

D. Solar Solutions is the better Investment because it has a lower risk of loss, and its annual return is $80 greater than Frontline Medical's

Answer 1

The expected annual return of Solar solutions is:

0.5*$1000 + 0.35*$200 - 0.15*$600 = $480

The expected annual return of Frontline medical is:

0.8*$750 - 0.2*$100 = $580

B. Frontline Medical has the higher risk of loss, but it is likely the better investment over time, because the annual expected return is $100 (= $580 - $480) greater than Solar Solution's