Scenario: Buying Shares Jordi is considering buying shares in two companies, Apple and Microsoft.If he invests
$1,000 in Apple, there is a 40% probability that his investment will be worth only $800 and a 60% probability that it will be worth $1,200 at the end of one year.If he invests $500 in Apple, there is a 40% probability that his investment will be worth $400 and a 60% probability that it will be worth $600 at the end of the year.The corresponding numbers for investment in Microsoft are identical.
(Scenario: Buying Shares) Based on the information provided in the scenario Buying Shares, the probability that Jordi will sustain a loss is if he invests $1,000 in either Apple or Microsoft and is
________ if he invests $500 apiece in Apple and in Microsoft.
A)40%; 40%
B)40%; 16%
C)80%; 20%
D)40%; 80%

Question

Quizplus · Accepted Answer

If Jordi invests $1,000 in either Apple or Microsoft, there is a 40% probability that he will sustain a loss. This means there is 60% probability that his investment will not result in a loss.

If Jordi invests $500 apiece in both Apple and Microsoft, the probabilities of sustaining a loss are independent of each other. Therefore, the probability of sustaining a loss in both investments is the product of the probabilities which is 0.4*0.4= 0.16 or 16%. Therefore, the probability that he will not sustain a loss in both investments is 1-0.16=0.84 or 84%. Thus, investing $500 each in Apple and Microsoft is the better choice as it reduces the overall risk.

Scenario: Buying Shares Jordi Is Considering Buying Shares in Two