A venture capitalist, willing to invest $1,000,000, has three investments to choose from: The first investment, a software company, has a 10 percent chance of returning $5,000,000 profit, a 30 percent chance of returning $1,000,000 profit, and a 60 percent chance of losing the million dollars. The second company, a hardware company, has a 20 percent chance of returning $3,000,000 profit, a 40 percent chance of returning $1,000,000 profit, and a 40 percent chance of losing the million dollars. The third company, a biotech firm, has a 10 percent chance of returning $6,000,000 profit, a 70 percent of no profit or loss, and a 20 percent 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 Statistics, 4.2 Mean or Expected Value and Standard Deviation, exercise 32