Investment and Expected Value:
In investing the two main things you judge an investment by are its expected return and risk. Usually higher risk means higher expected returns in the long-run. This is why stocks often outperform "safe" bonds.
Answer and Explanation: 1
|Type of Business||Median Rate of Return||Loss Rate||Expected Return|
|Retaurant/ Food Production||7%||5%||2%|
To solve this problem we first need to get the expected return for each investment which is in the above table as the median rate of return minus the loss rate. Ideally, we would want all our money to go to the investment with the highest expected return which is software, but we have constraints. Therefore, we will satisfy our constants and then allocate all remaining funds to software.
If 40% must go to Retail and Restaurant/Food Production, we will put all 40% in Restaurant/Food Production since it has the higher expected return of 2% instead of 1% for Retail. If 10% must go to Manufacturing then 10% will go to Manufacturing. The remaining 50% will all go to Software and we have our investment strategy.
Further questions should be about what risks the investors all willing to take. If they are risk averse, then possibly Software shouldn't be 50% of the portfolio since it has a high loss rate.
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fromChapter 2 / Lesson 3
Risk management is the addressing of unexpected or complex situations in the workplace, which includes navigating information technology issues. Learn how to identify different types of risk, and how to analyze and respond to information technology risks.