Question

Suppose Balin has $100 to invest in an opportunity that returns, for every $100 invested, $120 if it goes well but only $80 if it goes poorly. If leverage allows Balin to borrow $90 for every $10 he invests, what are his rates of profit and loss, respectively, if he borrows the full amount to invest in the opportunity?
A. 33.3 percent profit; 50 percent loss
B. 20 percent profit; 20 percent loss
C. 1,100 percent profit; 100 percent loss
D. 200 percent profit; 100 percent loss

Answer 1

Answer:

D) 200 percent profit; 100 percent loss.

Explanation:

There is a 50% chance that the company will make profit (20% profit) and 50% chance that it will lose money (20% loss).

Balin borrows $90 and invests $10 from his own money.

50% profit chance = $120 - $90 = $30 (200% profit)

50% loss chance = $80 - $90 = -$10 (100% loss)