A firm must decide between investing in two alternative risky projects, each requiring the same initial investment. Project A has an equal probability of four possible payoffs: £80m, £100m, £120m or £140m. Project B has a 50:50 chance of a payoff of £90m or £126m. Assuming that the firm's managers are risk averse, which project would they prefer, and why?

A firm must decide between investing in two alternative risky projects, each requiring the same initial investment. Project A has an equal probability of four possible payoffs: £80m, £100m, £120m or £140m. Project B has a 50:50 chance of a payoff of £90m or £126m. Assuming that the firm's managers are risk averse, which project would they prefer, and why?

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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