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 expects to lose $5,000 at the end of the year.However, if it is a rainy year and he invests only in the rain poncho company, he expects to earn $10,000.If it is a sunny year and he invests only in the sunglass company, he expects to earn $10,000 at the end of the year; if he invests only in the rain poncho company, he expects to 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) Based on the information in the scenario Diversification, if Morris invests all of his money in the sunglass 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 all of his money in the sunglass company, his expected gain or loss is $2,500 [($10,000 × 0.5) + (-$5,000 × 0.5) = $2,500]. However, the best choice would be to diversify his investment by investing $5,000 in both the sunglass and rain poncho companies. This way, he can minimize his risk and potentially earn a profit in both sunny and rainy years.

Scenario: Diversification Morris Is Considering Investing $10,000 in a Sunglass