vestments to choose from. The first investment, a social media company, has a 20% chance of returning $7,000,000 profit, a 30% chance of returning no profit, and a 50% chance of losing the million dollars. The second company, an advertising firm has a 10% chance of returning $3,000,000 profit, a 60% chance of returning a $2,000,000 profit, and a 30% chance of losing the million dollars.
Contingency Table
A contingency table can be defined as the visual representation of the relationship between two or more categorical variables that can be evaluated and registered. It is a categorical version of the scatterplot, which is used to investigate the linear relationship between two variables. A contingency table is indeed a type of frequency distribution table that displays two variables at the same time.
Binomial Distribution
Binomial is an algebraic expression of the sum or the difference of two terms. Before knowing about binomial distribution, we must know about the binomial theorem.
Creating a discrete
The first investment, a social media company, has a 20% chance of returning $7,000,000 profit, a 30% chance of returning no profit, and a 50% chance of losing the million dollars.
The second company, an advertising firm has a 10% chance of returning $3,000,000 profit, a 60% chance of returning a $2,000,000 profit, and a 30% chance of losing the million dollars.
The third company, a chemical company has a 40% chance of returning $3,000,000 profit, a 50% chance of no profit, and a 10% chance of losing the million dollars.
a. Construct a Probability Distribution for each investment. This should be 3 separate tables (See the instructors video for how this is done) In your table the X column is the net amount of profit/loss for the venture capitalist and the P(X) column uses the decimal form of the likelihoods given above.
b. Find the
c. Which investment has the highest expected return?
d. Which is the safest investment and why?
e. Which is the riskiest investment and why?
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(a) Create the probability distributions first:
Probability distribution of a social media company:
Principal amount = $1,000,000
The first investment, a social media company, has a 20% chance of returning $7,000,000 profit, a 30% chance of returning no profit, and a 50% chance of losing the million dollars.
Note: Positive Return means profit, and negative return means loss.
| Return Amount | P(X) | X P(X) |
| $7,000,000 | 0.2 | 1400000 |
| $0 | 0.3 | 0 |
| -$1,000,000 | 0.5 | -500000 |
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