Answered: The bank offers risk-free, annual…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Related questions

Question

The bank offers risk-free, annual interest rates of 2%. You come across an alternative investment option costing $1,000 and offering $1,300 after 1 year. This investment has a 15% chance of failure and offering $0.

Calculate the expected future value of this alternative investment.
Calculate the expected interest rate of this alternative investment.

Expert Solution

Step 1

a) Given that, the alternative investment option costing the $1,000 and giving the return of $1,300 after one year.

So total return on the alternative investment

Return = 1300 – 1000

= $300

There is risk associated with the return 15% chance of return 0 and 85% chance of return $300.

Expected return = 0.85*300 + 0.15*0

= $255

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions