(Scenario: Diversification)Use Scenario: Diversification.If Morris invests all of his money in the sunglass company,what is his expected gain or loss? Scenario: Diversification
Morris is considering investing $10,000 in a sunglass company or a rain poncho company.If it is a rainy year and he invests only in the sunglass company,he will lose $5,000.However,if it is a rainy year and he invests only in the rain poncho company,he will earn $10,000.If it is a sunny year and he invests only in the sunglass company,he will earn $10,000;if he invests only in the rain poncho company,he will lose $5,000 in a sunny year.There is a 50% chance of a sunny year and a 50% chance of a rainy year.
A)a loss of $2,500
B)to break even
C)a gain of $2,500
D)a gain of $10,000

Question

Quizplus · Accepted Answer

If Morris invests all of his money in the sunglass company, his expected gain or loss can be calculated as the weighted average of the possible outcomes:

Expected gain or loss = (0.5 * -$5,000) + (0.5 * $10,000) = $2,500

Therefore, Morris can expect to gain $2,500 if he invests all of his money in the sunglass company. However, this is not the best choice as there is a significant risk of losing money if it is a rainy year. In order to reduce this risk, Morris should diversify his portfolio by investing some money in both the sunglass and rain poncho companies.