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Consider the following two investment alternatives. First, a risky portfolio that pays 20% rate of return with a probability of 60% or 5% with a probability of 40%. Second, a treasury bill that pays 6%. If you invest $50,000 in the risky portfolio, your expected profit would be _________.

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hyderali230

Answer:

Expected profit will be $7,000

Explanation:

Expected value are calculated by multiplying the probabilities to the value of possible outcome. If we invest in risky portfolio then return rate wiil be as follow

Expected return rate on Risky portfolio = ( 20% x 60% ) + ( 5% x 40% )

Expected return rate on Risky portfolio = 12% + 2% = 14%

Amount invested = $50,000

Return on investment = $50,000 x 14% = $7,000

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