Investment Problems

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You have many years between now and retirement. There are various ways to “gamble” with your money. Some are pure gambles and others are “investments”. These sometimes get confused in an investor’s mind.

How good of an investment is the lottery? Blackjack? Stocks or bonds? Gold?

This is a quick research project – just look up one quick source for probable payoff/return fr each of the following various gambles or investments.

Ø Assume you have exactly $1000 to invest in each.

Ø For the lottery, blackjack, or roulette, assume you play one game choosing one set of number, one deal of cards or one number (e.g. one bet);

Ø For the stocks, bonds, a house, etc. assume you are invest for a 5 year period and look at ‘winning’ the average return for a five year period. (Many sources also give the variability risk of that return for any 5 year period so you can assess the variability / standard deviation in the returns).

For 1 point each, what is your actual expected cash return (Payoff) on each with $10,000 invested today?

(If you are having problems, you can fill out only half of these – but for fewer points.)

“Investment” option

% “Expected” Return if you “win”

Probability of winning or “risk”

PAYOFF (return times the probability) or return given the risk

Source of Data

Powerball with $400mm pot)

2.64

1/175,223,510
Blackjack with average odds
Roulette with average odds

Gold
Dow Jones Industrial Ave

NASDAQ

Buying a house

Buying a 30 year Treasury Bond

2. For up to 3 points, on the back of this page please write about in which or which combination you might invest your $10,000 and why?