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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)Use Scenario: Diversification.If Morris invests all of his money in the sunglass 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

Question

Quizplus · Accepted Answer

If Morris invests all of his money in the sunglass company, his expected gain or loss can be calculated as:
(0.5 * $10,000) + (0.5 * -$5,000) = $2,500 - $2,500 = $0
Therefore, he is expected to break even.
The best choice for Morris would be to diversify his investment and invest $5,000 in each company. This way, regardless of the weather, he will earn a profit of $5,000.

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