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Camera R Camera S Amount Probability Amount Probability Initial investment Annual rate of return Pessimistic Most likely Optimistic 1.00 1.00 $4,000 $4,000 0.25 20% 15% 0.50 0.20 0.55 25% 0.25 25% 35% 30% 0.25

Camera R Camera S Amount Probability Amount Probability Initial investment Annual rate of return Pessimistic Most likely Optimistic 1.00 1.00 $4,000 $4,000 0.25 20% 15% 0.50 0.20 0.55 25% 0.25 25% 35% 30% 0.25

Essentials Of Investments
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
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Micro-Pub, Inc., is considering the purchase of one of two microfilm cameras, R and S. Both should provide benefits over a 10-year period, and each requires an initial investment of $4,000. Management has constructed the accompanying table of estimates of rates of return and probabilities for pessimistic, most likely, and optimistic results.

  1. Determine the range for the rate of return for each of the two cameras.
  2. Determine the expected value of return for each camera.
  3. Purchase of which camera is riskier? Why?
Camera R Camera S Amount Probability Amount Probability Initial investment Annual rate of return Pessimistic Most likely Optimistic 1.00 1.00 $4,000 $4,000 0.25 20% 15% 0.50 0.20 0.55 25% 0.25 25% 35% 30% 0.25
Transcribed Image Text:Camera R Camera S Amount Probability Amount Probability Initial investment Annual rate of return Pessimistic Most likely Optimistic 1.00 1.00 $4,000 $4,000 0.25 20% 15% 0.50 0.20 0.55 25% 0.25 25% 35% 30% 0.25
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