1 Consider the two investments listed below with possible outcomes and probabilities: INVESTMENT (in $1000) SAFE RISKY INVESTMENT AMOUNT 40€ 40 GOOD SCENARIO OUTCOME PROB 45 0.40 80+ 0.40€ AVERAGE SCENARIO BAD+ SCENARIO OUTCOME PROB OUTCOME PROB 0.20 35€ 0.20 10- 42+ 45+ a) What are the expected payoffs (E(x)) and standard deviations for each investment? b) Suppose I have utility function U(*)=√(x). What is the expected utility from each investment? c) Which investment will I choose, if any? Show and explain your work and provide the intuition.< 0.40+ 0.40€
1 Consider the two investments listed below with possible outcomes and probabilities: INVESTMENT (in $1000) SAFE RISKY INVESTMENT AMOUNT 40€ 40 GOOD SCENARIO OUTCOME PROB 45 0.40 80+ 0.40€ AVERAGE SCENARIO BAD+ SCENARIO OUTCOME PROB OUTCOME PROB 0.20 35€ 0.20 10- 42+ 45+ a) What are the expected payoffs (E(x)) and standard deviations for each investment? b) Suppose I have utility function U(*)=√(x). What is the expected utility from each investment? c) Which investment will I choose, if any? Show and explain your work and provide the intuition.< 0.40+ 0.40€
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Chapter2: Fundamental Economic Concepts
Section: Chapter Questions
Problem 6E
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