Paul is risk averse and is offered the choice between contract A that pays $400 or $600, each with probability 50%, and contract B that pays $480 for certain. What will he do? He will take contract A if his coefficient of risk aversion is low. He will take contract A because it pays $500 on average which is more than $480. OHe will take contract B because he prefers to avoid risk. He will take contract B if his coefficient of risk aversion is low.

Paul is risk averse and is offered the choice between contract A that pays $400 or $600, each with probability 50%, and contract B that pays $480 for certain. What will he do? He will take contract A if his coefficient of risk aversion is low. He will take contract A because it pays $500 on average which is more than $480. OHe will take contract B because he prefers to avoid risk. He will take contract B if his coefficient of risk aversion is low.

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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Similar questions

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Imagine that you are a financial investor (able to offer a mixture of equity and debt) and you are asked to invest in a project to expand a section of the circular motorway around the town of Roermond. The project developer is looking to provide you with returns that are commensurate to the investment and risks you take. He offers you the following options: Option 1: You stand to make 7% on your investment (a mixture of debt and equity) which will be collected from toll charges to road users; Option 2: You can make 5% on your investment (a mixture of debt and equity) and then the contracting authority will pay a capacity payment based on an availability contract. What could be the reason for the difference in the two offered returns?
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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…
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M1

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