A venture capitalist, willing to invest $1,000,000, has three investments to choose from. The first investment, a software company, has a 10% chance of returning $5,000,000 profit, a 30% chance of returning $1,000,000 profit, and a 60% chance of losing the million dollars. The second company, a hardware company, has a 20% chance of returning $3,000,000 profit, a 40% chance of returning $1,000,000 profit, and a 40% chance of losing the million dollars. The third company, a biotech firm, has a 10% chance of returning $6,000,000 profit, a 70% of no profit or loss, and a 20% chance of losing the million dollars.
- Construct a PDF for each investment.
- Find the expected value for each investment.
- Which is the safest investment? Why do you think so?
- Which is the riskiest investment? Why do you think so?
- Which investment has the highest expected return, on average?
OpenStax Introductory Statistics 2e, 4.2 Mean or Expected Value and Standard Deviation, exercise 34