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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.
-(Scenario: Diversification)Use Scenario: Diversification.If Morris invests half of his money in the sunglass company and half in the rain poncho company,what is his expected gain or loss?
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 $5,000 in the sunglass company and $5,000 in the rain poncho company, then his expected gain or loss would be:

- In a rainy year: (0.5 x $10,000) - (0.5 x $5,000) = $2,500 gain.
- In a sunny year: (0.5 x $10,000) - (0.5 x $5,000) = $2,500 gain.

Therefore, his expected gain would be $2,500 regardless of the weather conditions. This is the best choice because it minimizes the potential risk of losing money in case of a rainy or sunny year.

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