Consider the following two investment alternatives: First, a risky portfolio that pays a 20% rate of return with a probability of 60% or a 5% rate of return with a probability of 40%. Second, a Treasury bill that pays 6%. If you invest $50,000 in the risky portfolio, your expected profit would be _________.
A. $3,000
B. $7,000
C. $7,500
D. $10,000
Answer: B. $7,000
Ending value = $50,000(1.14) = $57,000
Profit = $57,000 - 50,000 = $7,000