A decision maker faces an uncertain venture where he/she may earn $10.000 (with a probability p) or nothing. Following mutually exclusive options to this uncertain venture are listed below. The decision maker's statements are given following each option: • A certain venture that will bring $3.000 at the end of one year. "I will invest my money to this certain venture unless there's a 50% chance of winning the $10.000" • A certain venture that will bring $5.000 at the end of one year. "I will invest my money to this certain venture unless there's a 75% chance of winning the $10.000" • A certain venture that will bring $7.000 at the end of one year. "I will invest my money to this certain venture unless there's a 88% chance of winning the $10.000" • A certain venture that will bring $9.000 at the end of one year. "I will invest my money to this certain venture unless there's a 97% chance of winning the $10.000" On the other hand if the utility values for $10.000 and $0 are 1 and 0.1 respectively. 1. Calculate the utility values for $3.000, $5.000, $7.000 and $9.000. 2. Represent these values including that of $0 and $10.000 on a graph (the utility curve) 3. Is this decision maker a risk seeker or risk averse type person? Why? (With a maximum of 50 words!)
A decision maker faces an uncertain venture where he/she may earn $10.000 (with a probability p) or nothing. Following mutually exclusive options to this uncertain venture are listed below. The decision maker's statements are given following each option: • A certain venture that will bring $3.000 at the end of one year. "I will invest my money to this certain venture unless there's a 50% chance of winning the $10.000" • A certain venture that will bring $5.000 at the end of one year. "I will invest my money to this certain venture unless there's a 75% chance of winning the $10.000" • A certain venture that will bring $7.000 at the end of one year. "I will invest my money to this certain venture unless there's a 88% chance of winning the $10.000" • A certain venture that will bring $9.000 at the end of one year. "I will invest my money to this certain venture unless there's a 97% chance of winning the $10.000" On the other hand if the utility values for $10.000 and $0 are 1 and 0.1 respectively. 1. Calculate the utility values for $3.000, $5.000, $7.000 and $9.000. 2. Represent these values including that of $0 and $10.000 on a graph (the utility curve) 3. Is this decision maker a risk seeker or risk averse type person? Why? (With a maximum of 50 words!)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:A decision maker faces an uncertain venture where he/she may earn $10.000
(with a probability p) or nothing. Following mutually exclusive options to this
uncertain venture are listed below. The decision maker's statements are given
following each option:
• A certain venture that will bring $3.000 at the end of one year.
"I will invest my money to this certain venture unless there's a 50% chance of
winning the $10.000"
• A certain venture that will bring $5.000 at the end of one year.
"I will invest my money to this certain venture unless there's a 75% chance of
winning the $10.000"
• A certain venture that will bring $7.000 at the end of one year.
"1 will invest my money to this certain venture unless there's a 88% chance of
winning the $10.000"
• A certain venture that will bring $9.000 at the end of one year.
"1 will invest my money to this certain venture unless there's a 97% chance of
winning the $10.000"
On the other hand if the utility values for $10.000 and $0 are 1 and 0.1
respectively.
1. Calculate the utility values for $3.000, $5.000, $7.000 and $9.000.
2. Represent these values including that of $0 and $10.000 on a graph
(the utility curve)
3. Is this decision maker a risk seeker or risk averse type person? Why?
(With a maximum of 50 words!)
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