BN10.2 Case: Jennifer is willing to Pay $300 to Insure against the Theft of a $8,000 Necklace. The Probability of Theft is 4%. Question: What is Jennifer's Risk Tolerance?
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- 15. A city mayor decides to construct a new bridge over the major river in the town. The estimated life of such a structure will be 20 years. There is a 70% probability that the total initial costs (consulting fees and construction) will be $800,000 and a 30% probability that such costs would be $1 million. There is 100% probability that the maintenance costs would be $30,000 every 5 years. How much money should the city borrow now in order to carry out the entire project including maintenance? The interest rate is 5%.what is the riskConsider two local banks. Bank A has 100 loans outstanding, each for $0.9 million, that it expects will be repaid today. Each loan has a 7% probability of default, in which case the bank is not repaid anything. The chance of default is independent across all the loans. Bank B has only one loan of $90 million outstanding, which it also expects will be repaid today. It also has a 7% probability of not being repaid. Calculate the following: a. The expected overall payoff of each bank. b. The standard deviation of the overall payoff of each bank.
- 4) You are a financial professional working in a corporate loan department. A company named Mitch Hedberg Inc. (MH) comes to you for a loan. MH has debt from a previous loan (given by a different firm than yours) of 200. Your company analysts say that MH is likely to earn either 180, 240, or 300 this year - each with a probability of 1/3. MH wants you to lend them 100. MH could use this borrowed 100 to do either project X or project Y. Project X has a guaranteed return of 125 if the 100 is put there. Project Y may return either 0 or 210; each has probability of 1/2 and also costs 100 to do. a) Which project, X or Y, has the larger expected value? b) If you lend MH the 100, what will they do with the money? Why? Show your math. c) Should you lend MH the money or not? Show your math. d) Why did I choose the letters "MH" for this problem? What financial economic concept with initials "MH" is important in this problem?17-2 Game Show Uncertaninty In the final round of a TV game show, contestants have a chance to increase their current winnings of $1 million to $2 million. If they are wrong, their prize is decreased to $500,000. A contestant thinks his guess will be right 50% of the time. Should he play? What is the lowest probability of a correct guess that would make playing profitable?What does it mean to be Risk Averse?
- Question 13 Rhodri has a lottery ticket which will pay £80 with probability 0.5 and zero otherwise. He is willing to exchange the lottery ticket for a certain £25. What is the risk premium of the lottery ticket for Rhodri? Round your answer to 2 decimal places. Add your answerA small bakery serves very popular fresh meat pies every day. The cost of making each pie is $2, and they are sold for $5 each. Unsold pies at the end of the day will be put for a quick sale for $1.00 each, and they are always sold out. The record of the past daily sales of the pies is presented below. Demand 100 150 200 250 300 350 Probability 10% 20% 25% 25% 15% 5% Answer the following question by showing the calculations: a. Construct a table of profits or losses for each possible quantity of the pies based on the demands as recorded above. How many pies should the bakery make every day to maximize the profit? b. Confirm your answer in sub-question a) using a full marginal analysis based on the costs of overestimating and underestimating demands.In a final round of a MegaMillion TV show a contestant has a won $1 million and has a chance of doubling the reward. If he loses his winnings drop to $500,000. The contestant thinks his chances of winning is 50%. Should he play? What is the lowest probability of a correct guess that will make his betprofitable? Please show your work.
- 12. Over the last decade, robotic-drone a research and development company has researched in new drone technology for home delivery. Their sales department considers that they could sell as many as $90 million per year with a probability of 20%. With a most likely value of $76 million with a probability of 45% and a lowest value of $50 million. a. Determine the expected value of their sales. b. The sales department estimates that they could maintain this sales rhythm for 4 years with a probability of 67% or that this sales rhythm could be maintained for 8 years. Determine the Expected Value for the PW if the company considers a yearly interest rate of 10%A man purchased a $22,500, 1-yr term-life insurance policy for $695. Assuming that the probability that he will live for another year is 0.995, find the company's expected gain. (Round your answer to the nearest cent.) $A wheel of fortune in a gambling casino has 54 different slots in which the wheel pointer can stop. Four of the 54 slots contain the number 9. For a 1 dollar bet on hitting a 9, if he or she succeeds, the gambler wins 10 dollars plus the return of the 1 dollar bet. What is the expected value of this gambling game? What is the meaning of the expected value result?