2 Consider the two investments listed below with possible outcomes and probabilities:INVESTMENT(in $1000)SAFERISKYINVESTMENTAMOUNTⓇ40+40+GOODSCENARIOOUTCOME45+80+AVERAGE+SCENARIOPROB OUTCOME0.40*0.40€42+45+BAD+SCENARIOPROB OUTCOME PROB0.2035+0.2010+0.40€0.40+b)a) Suppose I have utility function U(*) = (x)2. What is the expected utility from each investment?Which investment will I choose, if any? Show and explain your work and provide the intuition.c) What is the value of the risk premium for the SAFE investment? Show and explain your work and providethe intuition.d) What is the value of the risk premium for the RISKY investment? Show and explain your work and providethe intuition.<+

It is given that: U = x2 x is the Investment outcomes Also,

2 Consider the two investments listed below with possible outcomes and probabilities: INVESTMENT (in $1000) SAFE RISKY INVESTMENT AMOUNT 40+ 40+ GOOD SCENARIO OUTCOME 45+ 80 AVERAGE SCENARIO PROB OUTCOME 0.40€ 42+ 0.40€ 45 BAD+ SCENARIO PROB OUTCOME 0.20 35€ 0.20 10 PROB 0.40€ 0.40+ a) Suppose I have utility function U(*) = (x)². What is the expected utility from each investment? b) Which investment will I choose, if any? Show and explain your work and provide the intuition. c) What is the value of the risk premium for the SAFE investment? Show and explain your work and provide the intuition.

2 Consider the two investments listed below with possible outcomes and probabilities: INVESTMENT (in $1000) SAFE RISKY INVESTMENT AMOUNT 40+ 40+ GOOD SCENARIO OUTCOME 45+ 80 AVERAGE SCENARIO PROB OUTCOME 0.40€ 42+ 0.40€ 45 BAD+ SCENARIO PROB OUTCOME 0.20 35€ 0.20 10 PROB 0.40€ 0.40+ a) Suppose I have utility function U(*) = (x)². What is the expected utility from each investment? b) Which investment will I choose, if any? Show and explain your work and provide the intuition. c) What is the value of the risk premium for the SAFE investment? Show and explain your work and provide the intuition.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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7. Consider an individual whose utility function over money is u(w) = 1+2w. (a) Is the individual risk-averse, risk-neutral, or risk-loving? Does it depend on w? (b) Suppose the individual has initial wealth ¥W and faces the possible loss of Y. The probability that the loss will occur is . Suppose insurance is available at price p, where p is not necessarily the fair price. Find the optimal amount of insurance the individual should buy. You may assume that the solution is interior. (c) Is there a price at which the individual will not want to buy any insurance? If so, find it. If no, explain.
Solve (d) and (e) please.
10. Which one of the following measures may be used to measure the risk of an investment on its own? a) Expected return of the investment. b) Expected utility of the investment for an investor. c) Standard deviation of the possible outcomes of the investment. d) The Bernoullian utility function's value of a good investment outcome.
9) A risk-neutral individual with current wealth w has already decided investing all his wealth in a project that has two possible net wealth outcomes wn and we (with probabilities pr and pe, respectively) where wr > w > we > 0, PrPe E (0,1), and pr + Pe = 1. Before he invests, he realises that there is a source of information that tells the individual which outcome will be realised with truth, what is the value of this information for the individual? a) pe(@ – w;), b) (Pn – Pe)w, c) Phwn + PeWe – w, d) Pr(w – wn).
solve d please
"Your company is comparing three projects that have risks associated with them. Based on the data in the foliowing data in the table, which should be chosen? Project A Project B Project C Probability 0.3 EUAW Probability 0.3 0.2 EUAW EUAW -$2,400 $2,000 $3,500 $3,000 -$2,300 $3,800 Probability 0.1 0.4 -$5,500 $7,200 $1,900 0.45 0.25 0.5 0.5
M1
Provide one example of an investment option for households. Then, analyze this option based on its liquidity, risk and expected rate of return (is it moderate, high or low?). Be sure to provide s short explanation for each.
1. Tanner is choosing between two investment options. He can invest $500 now and get (guaranteed) $550 in one year, or invest $500 now and get (guaranteed) $531.40 back later today. The risk-free rate is 3.5%. Which investment should Tanner prefer? A) $531.40 later today, since $1 today is worth more than $1 in one year. B) $550 in one year, since it is $50 more than he invested rather than $31.40 more than he invested. C) Neither - both investments have a negative NPV. D) Tanner should be indifferent between the two investments, since both are equivalent to the same amount of cash today.
3. The risk free rate is 3%. The optimal risky portfolio has an expected return of 9% and standard deviation of 20%. Answer the following questions. (a) Assume the utility function of an investor is U = E(r) − 0.5Aσ2. What is condition of A to make the investors prefer the optimal risky portfolio than the risk free asset? (b) Assume the utility function of an investor is U = E(r) − 2.5σ2. What is the expected return and standard deviation of the investor’s optimal complete portfolio?
‘Lottery A’ refers to a lottery ticket that pays $2,000 with a probability of 0.3, $8,000 with a probability of 0.4, $12,000 with a probability of 0.2, and $18,000 with a probability of 0.1.What is the expected value of Lottery A?A) $7200B) $8000C) $9000D) $7900E) None of the above
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