Instructions: 250+ Words No Title Page In Text Citations in APA Format NO PLAGIARISM!!! 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. State of economy Probability Market Return Gold Return Boom 0.15 25% (-30%) Moderate Growth 0.35 20% (-9%) Week Growth 0.25 5% 35% No Growth 0.25 0% 50% Based on the expected return, would you rather invest your money in the stock market or in gold? Why?

The decision to invest in the stock market or in gold depends fundamentally on the expected returns and the associated risks with each investment, which are influenced by the state of the economy. To determine the better investment option, it is crucial to analyze the expected returns of both assets based on the probabilities of different economic states. The expected return is calculated by multiplying each scenario's return by its probability and summing these products (Gordon, 2020). For the stock market, the expected return is calculated as (0.15 × 25%) + (0.35 × 20%) + (0.25 × 5%) + (0.25 × 0%), which equals 3.75% + 7% + 1.25% + 0%, totaling approximately 12%. Conversely, for gold, the expected return is (0.15 × -30%) + (0.35 × -9%) + (0.25 × 35%) + (0.25 × 50%), resulting in -4.5% - 3.15% + 8.75% + 12.5%, which sums to approximately 13.6%. These calculations suggest that, on average, gold offers a slightly higher expected return than the stock market (Hull, 2018). However, the risk associated with each investment must also be considered, indicated by the variance or standard deviation of these returns. Gold exhibits higher volatility due to its negative returns during boom periods and significant positive returns during no-growth scenarios, which increases its risk profile. The stock market, although volatile, demonstrates more consistent expected returns and relatively lower risk. Consequently, if the investor's priority is maximizing expected return, gold appears marginally better. However, if risk aversion factors and stability are more important, the stock market might be preferable as it provides a more balanced risk-return profile. Overall, given the slight edge in expected return but considering risk factors, an investor with moderate risk tolerance may prefer the stock market (Bodie et al., 2014). Nonetheless, individual risk preferences and investment goals should ultimately guide this decision, emphasizing the importance of personal risk assessment and diversification strategies (Elton & Gruber, 2018).

References

• Bodie, Z., Kane, A., & Marcus, A. J. (2014). Investments. McGraw-Hill Education.
• Elton, E. J., & Gruber, M. J. (2018). Modern Portfolio Theory and Investment Analysis. Wiley.
• Gordon, R. J. (2020). The Rise and Fall of American Growth: The U.S. Standard of Living Since the Civil War. Princeton University Press.
• Hull, J. C. (2018). Risk Management and Financial Institutions. Wiley.