Topic: Decision Alternatives

State of economy Probability Market Return Gold Return

-Boom...........................(0.15)....................(25%).................(-30%)

-Moderate Growth.........(0.35)....................(20%)................(-9%)

-Week Growth...............(0.25)....................(5%)...................(35%)

-No Growth....................(0.25)....................(-14%)...............(50%)

Based on the expected return, would you rather invest your money in the stock market or in gold? Why? [*****THIS WAS MY ANSWER*****]

If I follow the formula of Expected Value then I will calculate the stock market as follows:

.15*25+ .35*20+.25*5+.25+ (-14)= 8.5%

Calculations for the Gold Market:

.15*(-30)+.35*(-9)+.25*35+.25*50= 13.6%

Therefore, it would be smarter to invest in the Gold market because the return rate is higher.

[*********MY PROFESSOR RESPONDED--Need help here!*********]

great job and well done on your calculations! Based solely on these values it does look like gold would be the better investment. However, when investing we often consider the risk of each investment. We can estimate the risk of each by finding the standard deviation for both gold and stocks:

https://www.mathsisfun.com/data/random-variables-mean-variance.html

A higher standard deviation would mean the investment is more risky. Would you consider adding these calculations to your post and commenting on which investment is more risky?