Suppose Nara could invest her $1000 in a savings account or she could invest in the stock market. After one year, the savings account has a guaranteed 5 percent interest rate and the stock market has a 10 percent chance of tripling her money, and 90 percent chance of losing it all. To give Nara the maximum expected wealth, what should she do?
A) She should invest all of her money in the stock market.
B) She should invest all of her money in the savings account.
C) She should invest half of her money in the savings account and half in the stock market.
D) She should only invest her money in the stock market if she is risk averse.

Question

Quizplus · Accepted Answer

The expected value of the stock market investment is $300 (0.1 * $3000 + 0.9 * $0), while the savings account guarantees $1050. The savings account provides a higher expected wealth.

Suppose Nara Could Invest Her $1000 in a Savings Account