Discussion:
Suppose that one of our colleagues has $2000 available to invest. Assume that all of this money must be placed in one of three investments: a particular money market fund, a stock, or gold. Each dollar your colleague invests in the money market fund earns a virtually guaranteed 12% annual return. Each dollar he invests in the stock earns an annual return characterized by the probability distribution provided. Finally, each dollar he invests in gold earns an annual return characterized by the probability distribution given in the file.
Q. If your colleague must place all of his available funds in a single investment, which investment should he choose to maximize his expected earnings over the next year?
| Investment data |
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| Distribution of Annual Returns for Given Stock |
| Return |
Probability |
|
|
| 0.00 |
0.10 |
|
|
| 0.06 |
0.20 |
|
|
| 0.12 |
0.40 |
|
|
| 0.18 |
0.20 |
|
|
| 0.24 |
0.10 |
|
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|
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| Distribution of Annual Returns for Gold |
|
| Return |
Probability |
|
|
| -0.36 |
0.10 |
|
|
| -0.12 |
0.20 |
|
|
| 0.12 |
0.40 |
|
|
| 0.36 |
0.20 |
|
|
| 0.60 |
0.10 |
|
|