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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) Look at the 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

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Quizplus · Accepted Answer

In a sunny year, Morris earns $5,000 from the sunglass company and loses $2,500 from the rain poncho company, netting $2,500. In a rainy year, he earns $5,000 from the rain poncho company and loses $2,500 from the sunglass company, also netting $2,500.

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