Suppose that the percentage annual return you obtain when yo

Suppose that the percentage annual return you obtain when you invest a dollar in gold or the stock market is dependent on the general state of the national economy as indicated below. For example, the probability that the economy will be in \"boom\" state is 0.15. In this case, if you invest in the stock market your return is assumed to be 25%; on the other hand if you invest in gold when the economy is in a \"boom\" state your return will be minus 30%. Likewise for the other possible states of the economy. Note that the sum of the probabilities has to be 1--and is.

Based on the expected return, would you rather invest your money in the stock market or in gold? Why?

Please answer with clear step by step instructions on how to arrive at the answer.

Solution

  1) Apparently you need some spaces in a line or else the end of the line is truncated.
2) Let\'s say the numbers are
Boom, 0.15, 25%, -30%
Mod, 0.35, 25%, -10%
Weak, 0.25, 5%, +10%
None 0.25, -14%, +30%
The \"expected gain\" for market is
0.15*25% + 0.35*25% + 0.25*5% - 0.25*14%
and for gold is
-0.15*30% - 0.35*10% + 0.25*10% + 0.25*30%