QUESTION 6 Part A Ryan is a risk adverse investor. He has $40,000 to invest for one year. He has two choices: Choice #1: Buy shares of Tesla Inc.; which can payoff: • 510.000 if Tesla is in a high payoff state (H) and, • 54,000 If Tesla is in a low payoff state (L) Choice #2: Buy shares of Apple Inc.: with which can payoff: • $10,500 if Apple is in a high payoff state (H) and, • 52,000 if Apple is in a low payoff state (L) Ryan's prior probabilities on the future state of Tesla and Apple are both: P(H) = 0.80 P(L) = 0.20 %3D Ryan's utility is equal to the square root of the amount of the payoff. (Risk adverse) Required: (Show all your calculations) (Ignore initial investment of 540,000) a. Which choice of investment would Ryan prefer; Shares of Tesla or Apple?
QUESTION 6 Part A Ryan is a risk adverse investor. He has $40,000 to invest for one year. He has two choices: Choice #1: Buy shares of Tesla Inc.; which can payoff: • 510.000 if Tesla is in a high payoff state (H) and, • 54,000 If Tesla is in a low payoff state (L) Choice #2: Buy shares of Apple Inc.: with which can payoff: • $10,500 if Apple is in a high payoff state (H) and, • 52,000 if Apple is in a low payoff state (L) Ryan's prior probabilities on the future state of Tesla and Apple are both: P(H) = 0.80 P(L) = 0.20 %3D Ryan's utility is equal to the square root of the amount of the payoff. (Risk adverse) Required: (Show all your calculations) (Ignore initial investment of 540,000) a. Which choice of investment would Ryan prefer; Shares of Tesla or Apple?
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:QUESTION 6
Part A
Ryan is a risk adverse investor. He has $40,000 to invest for one year. He has two choices:
Choice #1: Buy shares of Tesla Inc.; which can payoff:
• 510.000 if Tesla is in a high payoff state (H) and,
• 54,000 If Tesla is in a low payoff state (L)
Choice #2: Buy shares of Apple Inc.: with which can payoff:
• $10,500 if Apple is in a high payoff state (H) and,
• 52,000 if Apple is in a low payoff state (L)
Ryan's prior probabilities on the future state of Tesla and Apple are both:
P(H) = 0.80
P(L) = 0.20
%3D
Ryan's utility is equal to the square root of the amount of the payoff. (Risk adverse)
Required: (Show all your calculations) (Ignore initial investment of 540,000)
a. Which choice of investment would Ryan prefer; Shares of Tesla or Apple?
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