Question

Erica has her savings in a bank account that pays 4.0% interest per year. She is considering buying stock in a pharmaceuticals company that is developing a cure for cellulite. Her research indicates that she could earn 45% in one year if the cure is successful or lose 65% in one year if it is not. At what probability of success would the pharmaceuticals stock be the better choice? (Round your answer to two decimal places.)

Answer 1

We know that erica's savings pays 4%p.a

So, for one unit of amount erica would have 1.04 in her bank.

If she is considering buying the stocks then there are two cases:

Case1: If the cure is successful, then she could earn 45%p.a

So, for one unit of amount erica would have 1.45 in her bank

Case2: If the cure failed to achieve success then she could loose 65%p.a

So, for one unit of amount erica would have (1-0.65)= 0.35 remaining in her bank.

So, by using the above information we can create an equation from which we can compute the probability of success(or we say better choice), it would be as followed:

Let's assume that x-> Amount in bank

And p-> probability of success

The equation would be as followed:

This means there are atleast 62.7% chance that case1 would be a success.