You have $60 and have decided to invest it in the stocks of two companies: Google and Bing. The stock of Google cost $10/share and Bing stock costs $5/share. In one scenario, Google stock will be worth $30 and Bing will be worth $8. In the only other scenario, which is equally likely, Google will be worth $10/share Bing will be worth $12/share. Assuming you are risk averse, which of the following investment options yield the greatest expected utility? (a) Spend half of your money on Google and half on Bing.
(b) All three of these options are the same.
(c) Spend all your money on Bing stock.
(d) Spend all your money on Google stock.

The option A is correct.

Explanation:

Solution

In this example, i have $60

The stock of Google cost $10/share

The Bing stock costs $5/share

Here i have three options to pick from, which are as follows:

Half of your money will be spent on Google and half on Bing, Spend all your money on Bing stock, and Spend all your money on Google stock.

Now,

If i do spend all my money only on Bing stock, my total shares would be computed as follows:

Total shares = Total money/Per stock price = $60/$5 = 12 shares.

The bing stock can either be $12 or $8 stock.

So,

When it is at $8 per stock, it will be $8 * 12 shares =$96 (My returns)

When it is at $12 per stock, it will be $12* 12 shares =$ 144 (My returns)

If i spend all my money on Google stock ($30 + $30) and half on bing

The $30 on Google stock will give $30/$10 = 3 shares

For Bing it will be $30/$5 = 6 shares

When Bing stock prices is at 8$/stock, Google stock price will be  $30/stock

So,

($30, 3 shares ) + ($8 * 6 shares)

= $90 + $48 = $138

Thus,

When Google stock prices are $10/stock. Bing stock prices will be at $12 per stock.

Which becomes,

= ($10 * 3 shares) + ($12 * 6 shares)

= $30 + $72 = $102

Because am a risk taker, i will go for more better options that will be safer.

So, if i buy all shares for Bing or Google, there is a possibility that  i will have lower returns ($60 and $96) but when i buy half each of them, there will be no risk of lower returns.

Therefore, the option A is correct.

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