A company has a choice of three investment schemes. Option I gives a sure $25,000 return on investment. Option II gives a 50% chance of returning $50,000 and a 50% chance of returning $10,000. Option III gives a 5% chance of returning $100,000 and a 95% chance of returning nothing. Which option should the company choose?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
icon
Related questions
Question

1

A company has a choice of three investment schemes. Option
I gives a sure $25,000 return on investment. Option II gives a
50% chance of returning $50,000 and a 50% chance of
returning $10,000. Option III gives a 5% chance of returning
$100,000 and a 95% chance of returning nothing. Which
option should the company choose?
O Option II if it wants to maximize expected return
O Option III if it wants to maximize expected return
Because of chance, it really doesn't matter which option it
chooses.
O Option I if it wants to maximize expected return
All of the options have equal expected return so it doesn't really
matter
Transcribed Image Text:A company has a choice of three investment schemes. Option I gives a sure $25,000 return on investment. Option II gives a 50% chance of returning $50,000 and a 50% chance of returning $10,000. Option III gives a 5% chance of returning $100,000 and a 95% chance of returning nothing. Which option should the company choose? O Option II if it wants to maximize expected return O Option III if it wants to maximize expected return Because of chance, it really doesn't matter which option it chooses. O Option I if it wants to maximize expected return All of the options have equal expected return so it doesn't really matter
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 2 steps

Blurred answer
Knowledge Booster
Financial Reporting in Hyperinflationary Economies
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education