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3 September, 19:29

I have $5,000 and am weighing various options to save more for my sons' college tuition. There are 4 different account options: direct portfolio, guaranteed interest, high risk stock, or do nothing. The guaranteed interest account has a return of $9,000. The direct portfolio has a 5% chance of returning $20,000 a 60% chance of returning $15,000, a 30% chance of returning $10,000, and a 5% chance of returning $4,000. The high risk stock has a 1% chance of returning $100,000 and a 99% chance of losing everything.

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  1. 3 September, 19:45
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    I would advice to invest on the direct portfolio as yield the better expected return with the current information.

    Explanation:

    When an investment outcome can vary, we multiply the outcome by the probability:

    direct portfolio

    0.05 x 20,000 = 1,000

    0.60 x 15,000 = 9,000

    0.30 x 10,000 = 3,000

    0.05 x 4,000 = 200

    Expected return 13,200

    HIgh risk stock

    0.01 x 100,000 = 1,000

    0.99 x 0 = 0

    Expected return 1,000

    For the other two option the retun is "safe"

    do nothing: 5,000

    guaranteed interest: 9,000

    The best outcome will be of the direct portfolio as the expected return is higher than other option: 13,200
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