My friend, Ahmad, is trying to determine which of two opportunities he should invest in (only one of them). His options are Bitcoin and S&P 500. If he invests in Bitcoin, he believes that he has a 10% chance of making 15% profit, a 25% chance of only 8% profit, 15% of losing 10% c his investment capital (-10%), and a 50% chance of no change in his investment capital (0%). If Ahmad invests in S&P500, he has a 70% chance for the 8% profit, a 25% chance for no change (0%), 3% chance for losing -10%, and 2 for a 15% profit. Ahmad is indifferent between the following lotteries. L₁ 0% and L₂ also indifferent between 15% -10%
My friend, Ahmad, is trying to determine which of two opportunities he should invest in (only one of them). His options are Bitcoin and S&P 500. If he invests in Bitcoin, he believes that he has a 10% chance of making 15% profit, a 25% chance of only 8% profit, 15% of losing 10% c his investment capital (-10%), and a 50% chance of no change in his investment capital (0%). If Ahmad invests in S&P500, he has a 70% chance for the 8% profit, a 25% chance for no change (0%), 3% chance for losing -10%, and 2 for a 15% profit. Ahmad is indifferent between the following lotteries. L₁ 0% and L₂ also indifferent between 15% -10%
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:My friend, Ahmad, is trying to determine which of two opportunities he should invest in (only one of them). His options are Bitcoin and
S&P 500.
If he invests in Bitcoin, he believes that he has a 10% chance of making 15% profit, a 25% chance of only 8% profit, 15% of losing 10% of
his investment capital (-10%), and a 50% chance of no change in his investment capital (0%).
If Ahmad invests in S&P500, he has a 70% chance for the 8% profit, a 25% chance for no change (0%), 3% chance for losing -10%, and 2%
for a 15% profit.
Ahmad is indifferent between the following lotteries.
L₁
Ly
0% and L₂
also indifferent between
8% and LA
V
15%
-10%
15%
-10%
If Ahmad wants to invest in what maximizes his expected return on investment, which investment is the best? Please note: x-0.74 and
y-0.14. In the box below put the expected utility for the investment he should pick. Write your answer with three decimals.
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