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This question involves choosing between a stock and a bond investment, with given probabilities and returns.

### Step-by-step breakdown:

1. **Stock investment:**
   - The stock has a 30% chance to rise to $2,200 and a 70% chance of becoming worthless.
   - Expected return from stock: 
     \[
     E[\text{Stock}] = (0.30 \times 2200) + (0.70 \times 0) = 660 + 0 = 660
     \]
   The expected wealth from the stock is $660.

2. **Bond investment:**
   - The bond promises a certain return of 25%. If you invest $1,000 in the bond, you will get:
     \[
     \text{Bond Return} = 1000 \times (1 + 0.25) = 1250
     \]
   The bond guarantees $1,250 at the end of the year.

3. **Decision:**
   - Comparing the expected return from the stock ($660) with the bond's guaranteed return ($1,250), the bond is the safer and more profitable choice based on expected value.
   
4. **How much wealth is reduced by making the wrong choice:**
   - If you choose the stock over the bond, the reduction in expected end-of-year wealth is:
     \[
     \text{Wealth Reduction} = 1250 - 660 = 590
     \]
   So, your expected wealth would be reduced by **$590** if you choose the stock instead of the bond.

Would you like more details or have any questions?

### Follow-up questions:
1. What would be the expected return if the probability of stock success were higher?
2. How does risk aversion factor into this investment decision?
3. What is the variance of the expected returns for the stock?
4. How could the time horizon affect the choice between stock and bond?
5. If the bond offered a lower return, at what rate would the stock become the better choice?

**Tip:** Always compare both the expected returns and the risks involved when making investment decisions.

Suppose that you are trying to decide whether to spend $1,000 on stock issued by Wild Internet or on a bond issued by the same company. There is a 30 percent chance that the value of the stock will rise to $2,200 at the end of the year and a 70 percent chance that the stock will be worthless at the end of the year. The bond promises an interest rate of 25 percent per year, and it is certain that the bond and interest will be repaid at the end of the year. Assuming that your time horizon is exactly one year, will you choose the stock or the bond? By how much is your expected end-of-year wealth reduced if you make the wrong choice?

Learn how to analyze the decision between investing $1,000 in a stock or bond using expected value. This example includes probability calculations and the comparison of returns using an interest rate of 25%. Suitable for students at the college level studying finance or economics.

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