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Suppose I offer you a choice among several investments. No matter which one you choose, you will invest the same amount of money, $200,000.
Suppose I offer you a choice among several investments. No matter which one you choose, you will invest the same amount of money, $200,000. Here are your investment choices and the expected results for the year.
1 - Investment #1 will give you a guaranteed profit of $100,000 for the year. So you end the year with $300,000 (your $200,000 investment + the $100,000 profit).
2 - Investment #2 gives you a 50% chance to make a profit of $200,000 and a 50% chance of zero profit for the year. But you will not lose any money. So you have a 50% chance to end the year with $400,000 but a 50% chance you will end the year with the same $200,000 you started with.
3 - Investment #3 provides a 50% chance to make a $400,000 profit for the year and a 50% chance of losing $200,000 for the year. So at the end of the year, there is a 50% chance you will wind up with $600,000 (your $200,000 investment + $400,000 profit) but a 50% chance you will have nothing, having lost your $200,000 investment.
Which investment would you choose? Why? What does your choice say about your risk tolerance? If you chose option 1 or 2, what amount could would it choose option 3, $800,000, a million?
