Consider the following two investment alternatives. First, a risky portfolio that pays 20% rate of return with a probability of 60% or 5% with a probability of 40%. Second, a Treasury bond that pays 6%. If you invest $50 000 in the risky portfolio, your expected profit would be ________.
A)$3 000
B)$7 000
C)$7 500
D)$10 000

Question

Quizplus · Accepted Answer

The expected return of the risky portfolio is calculated as (0.6 * 20%) + (0.4 * 5%) = 12% + 2% = 14%. The expected profit on a $50,000 investment is 14% of $50,000, which is $7,000.

Consider the Following Two Investment Alternatives