Question

You can either invest in Project A or B. Project A could have a value of $150 with a probability of 0.1 or a value of $75 with a probability of 0.9. Project B could have a value of $110 with a probability of 0.2 or a value of $65 with a probability of 0.8. Which project should you invest in

Answer 1

I will invest in Project A, as its Expected value is higher than the project B.

Step-by-step explanation:

Project A

Return Probability Expected Value

$150 0.1 $150 x 0.1 = $15

$75 0.9 $75 x 0.9 = $67.5

Total Expected Value = $15 + $67.5 = $82.5

Project B

Return Probability Expected Value

$110 0.2 $110 x 0.2 = $22

$65 0.8 $65 x 0.8 = $52

Total Expected Value = $22 + $52 = $74

The Expected return of Project A is higher, I will invest in the Project A.