In: Statistics and Probability

your aunt comes to you with an investment opportunity. She needs
you to invest $500,000. If the investment succeed, it will pay you
back your investment plus an additional $2 million. If it fails you
get nothing back. She thinks there is a 30% chance of success.

a. what is the expected value of the investment?

b. what is the most likely outcome?

a.

Returns(X) | Probability(P) | XP | |

Success | 7,000,000 | 0.30 | 2,100,000 |

Failure | 0 | 0.70 | 0 |

Expected value ==> | 2,100,000 |

b. Most likely outcome: Expected value = $ 1,867,600 ( As per following calculation)

Returns(X) | Probability(P) | XP | |

Success | 7,000,000 | 0.2668 | 1,867,600 |

Failure | 0 | 0.7332 | 0 |

Expected value ==> | 1,867,600 |

To find most likely outcome:

The following simulation of 9 trials using Binomial distribution was conducted and we find most likely

probability of success = 0.2668.

Trials | Probability of success |

1 | 0.1211 |

2 | 0.2335 |

3 |
0.2668 |

4 | 0.2001 |

5 | 0.1029 |

6 | 0.0368 |

7 | 0.0090 |

8 | 0.0014 |

9 | 0.0001 |

your aunt comes to you with an investment opportunity. She needs
you to invest $500,000. If the investment succeed, it will pay you
back your investment plus an additional $2 million. If it fails you
get nothing back. She thinks there is a 30% chance of success.
a. what is the expected value of the investment?
b. what is the most likely outcome?

Your broker calls to offer you the investment opportunity of a
lifetime, the chance to invest in mortgage backed securities. The
broker explains that these securities are entitled to the principal
and interest payments received from a pool of residential
mortgages. List some of the questions you would ask your broker to
assess the risk of this investment opportunity. Questions you would
ask include: (Select the best choice below.)
___A. Will borrowers soon be experiencing an interest rate
increase because...

Aunt Martha plans to invest in a project in Singapore. The
project requires an initial investment of SGD500,000 and is
expected to produce cash inflows of SGD169,000 a year for four
years. The project will be worthless after four years. The expected
inflation rate in Singapore is 2.1 percent while it is 1.4 percent
in the U.S. The applicable interest rate in Singapore is 3 percent.
The current spot rate is SGD1 = US$.75. What is the net present
value...

You can invest your money in either investment ONE or investment
TWO. You will invest for 2 years. Investment ONE yields 6% he first
year and 65% the second year. Investment TWO yields 65% the first
year and 6% the second year. Interest is compounded the same for
both investments. Also, interest is compounded the same for both
years. Which investment leads to the higher return?
a. investment ONE
b. investment TWO
c. the return on investment ONE = the...

You are offered the following investment opportunity: • Invest
$425 today • Receive $100 at the end of Year 1; receive $200 at the
end of year 3, and receive $350 at the end of Year 6 • You want to
earn a required return of 13% Required: a) Should you invest in
this opportunity b) Why or Why not?

You are offered the following investment opportunity: • Invest
$425 today • Receive $100 at the end of Year 1; receive $200 at the
end of year 3, and receive $350 at the end of Year 6 • You want to
earn a required return of 13% Required: a) Should you invest in
this opportunity b) Why or Why not?

(2) Your wealthy Aunt offers you a graduation gift. She will
give you a $10,000 lump sum payment or 1,100/year for the next 10
years. This is essentially a risk free gift from your standpoint.
The risk free rate currently sites at 2.5%. Which will you take?
Why? Please use the financial principles from the chapter to make
this decision. show your work.

you have an opportunity to invest in a business that will double
your money in 8 years. what is the annual rate of return of this
investment opportunity

Scenario
Wanda comes to you because she is discouraged and needs to talk.
Her parents have heard she is thinking of expanding her business
and even possibly taking out a second mortgage on her home to fund
the expansion. They have never been overly supportive of her
business, but as long as it seemed like a “hobby,” they didn’t have
much to say. Recently Wanda’s mother called and expressed strong
reservations about Wanda taking such a large step. This made...

Assignment
Wanda comes to you because she is discouraged and needs to talk.
Her parents have heard she is thinking of expanding her business
and even possibly taking out a second mortgage on her home to fund
the expansion. They have never been overly supportive of her
business, but as long as it seemed like a “hobby,” they didn’t have
much to say. Recently Wanda’s mother called and expressed strong
reservations about Wanda taking such a large step. This made...

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