One of your colleagues has $2000 available to invest. Assume that all of this money must be placed in one of three investments: a particular money market fund, a stock, or gold. Each dollar your colleague invests in the money market fund earns a virtually guaranteed 3% annual return. Each dollar he invests in the stock earns an annual return characterized by the probability distribution provided in the file P06_46.xlsx. Finally, each dollar he invests in gold earns an annual return characterized by the probability distribution given in the same file.
a. If your colleague must place all of his available funds in a single investment, which investment should he choose to maximize his expected earnings over the next year?
b. Suppose now that your colleague can place all of his available funds in one of these three investments as before, or he can invest $1000 in one alternative and $1000 in another. Assuming that he seeks to maximize his expected total earnings in one year, how should he allocate his $2000?