Investment A pays $1,200 half of the time and $800 half of the time. Investment B pays $1,400 half of the time and $600 half of the time. Which of the following statements is correct?
A) Investment A and B have the same expected value, but A has greater risk.
B) Investment B has a higher expected value than A, but also greater risk.
C) Investment A and B have the same expected value, but A has lower risk than B.
D) Investment A has a greater expected value than B, but B has less risk.

Question

Quizplus · Accepted Answer

The expected value for both investments is the same: (1/2 * $1,200) + (1/2 * $800) = $1,000 for Investment A and (1/2 * $1,400) + (1/2 * $600) = $1,000 for Investment B. However, Investment A has a lower risk because the difference between its high and low payments ($400) is less than the difference for Investment B ($800).

Investment a Pays $1,200 Half of the Time and $800