Question

A venture capitalist, willing to invest $1,000,000, has three investments to choose from. The first investment, a software company, has a 15% chance of returning $9,000,000 profit, a 24% chance of returning $2,000,000 profit, and a 61% chance of losing the million dollars. The second company, a hardware company, has a 11% chance of returning $5,000,000 profit, a 18% chance of returning $1,000,000 profit, and a 71% chance of losing the million dollars. The third company, a biotech firm, has a 6% chance of returning $8,000,000 profit, a 43% of no profit or loss, and a 51% chance of losing the million dollars.

Order the expected values from smallest to largest.

A) second, third, first

B) second, first, third

C) first, third, second

D) third, first, second

E) first, second, third

F )third, second, first

Answer 1

ANSWER::

Let's calculate the expected values for each company. Say X be the profit expected in Millions.

Company A:

E(X) = Σ P(X).X = 0.15*9 + 0.24*2 + 0.61*(-1) = 1.35 + 0.48 - 0.61 = $1.22M

Company B:

E(X) = Σ P(X).X = 0.11*5 + 0.18*1 + 0.71*(-1) = 0.55 + 0.18 - 0.71 = $0.02 M

Company C:

E(X) = Σ P(X).X = 0.06*8 + 0.43*0 + 0.51*(-1) = 0.48 + 0 - 0.51= $-0.03 M

Order of expected values from smallest to largest is:

B ($-0.03 M) < A($0.02 M) < C($1.22 M)

OPTION: (F) IS CORRECT ANSWER (third, second, first)

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