Consider the following two investment alternatives: First, a risky portfolio that pays a 20% rate of return with a probability of 60% or a 5% rate of return with a probability of 40%. Second, a Treasury bill that pays 6%. If you invest $50,000 in the risky portfolio, your expected profit after one year would be ________.
A) $3,000
B) $7,000
C) $7,500
D) $10,000

Question

Quizplus · Accepted Answer

E(r_p) = (.6 × 20%) + (.4 × 5%) = 14% Ending value = $50,000(1.14) = $57,000 Profit = $57,000 - 50,000 = $7,000

Consider the Following Two Investment Alternatives: First, a Risky Portfolio