Question

You are trying to decide between two investments. The first investment has a 90% chance to make you $2,000, but the alternative is that you could be losing $5,000. The second investment has a 15% chance to make you $25,000, but the alternative is that you could be losing $5,000. Use expected value to help decide which investment is the mathematically smart choice. (Hint: make two separate expected values and compare).

Answer 1

Option 1
Scenario	Profit/Loss	Probability	Expected Value
	A	B	C = A * B
Profit	$         2,000	90%	$        1,800
Loss	$       (5,000)	10%	$         (500)
	Expected Value		$        1,300

Option 2
Scenario	Profit/Loss	Probability	Expected Value
	A	B	C = A * B
Profit	$       25,000	15%	$        3,750
Loss	$       (5,000)	85%	$     (4,250)
	Expected Value		$         (500)

It is better to Opt first Investment Choise, as the expected value is higher, when compared to second Investment option.