Risky Investments 1 Copyright © 2026 Pearson Education, Inc. Risky Investments A new technology stock is determined to have a 10% probability of gaining 50% in the next 2 years. With an initial investment of $10,000, the total after 2 years would be $15,000. The problem is that this investment is determined to have a 40% probability of losing 50% over the next 2 years, which would leave less money than the initial investment. It has a 50% probability of maintaining approximately the same price. Instead of this risky investment, diversifying into an index fund would be safer. Making the same initial investment in the index fund, there is a 50% probability of gaining over 20%, and only a 10% probability of losing 5% over the next two years. It has a 40% probability of maintaining approximately the same price. 1. What is the expected value of investing in the technology stock? 2. What is the expected value of investing in the index fund? 3. What is the standard deviation for investing in the technology stock? 4. What is the standard deviation for investing in the index fund?
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