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Scenario: Diversification
Morris is considering investing $10,000 in a sunglass company or a rain poncho company. If it is a rainy year and he invests only in the sunglass company, he will lose $5,000. However, if it is a rainy year and he invests only in the rain poncho company, he will earn $10,000. If it is a sunny year and he invests only in the sunglass company, he will earn $10,000; if he invests only in the rain poncho company, he will lose $5,000 in a sunny year. There is a 50% chance of a sunny year and a 50% chance of a rainy year.
-(Scenario: Diversification) Look at the scenario Diversification. If Morris invests all of his money in the rain poncho company, what is his expected gain or loss?
A) a loss of $2,500
B) to break even
C) a gain of $2,500
D) a gain of $10,000

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Quizplus · Accepted Answer

Morris has a 50% chance of a sunny year and a 50% chance of a rainy year. If he invests all of his money in the rain poncho company, he will earn $10,000 in a rainy year and lose $5,000 in a sunny year. So, his expected gain or loss is (0.5 * $10,000) + (0.5 * -$5,000) = $2,500.

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