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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,he will earn _____ in a sunny year and _____ in a rainy year.
A) $2 500;$0
B) $1 250;$1 250
C) -$2 500;$2 500
D) $2 500;$2 500

Question

Quizplus · Accepted Answer

By diversifying his investment and investing in both companies, Morris will earn $2 500 in a sunny year ($10 000 earned from sunglass company - $5 000 lost from the rain poncho company) and $2 500 in a rainy year ($10 000 earned from the rain poncho company - $5 000 lost from the sunglass company). This is a better option than investing all of his money in one company and potentially losing money in a year where that company performs poorly.

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