We now have $5,000 in assets and are given a choicebetween investment 1 and investment 2. With investment 1,80% of the time we increase our asset position by $295,000,and 20% of the time we increase our asset position by$95,000. With investment 2, 50% of the time we increaseour asset position by $595,000, and 50% of the time weincrease our asset position by $5,000. Our utility functionfor final asset position x is u(x). We are given the followingvalues for u(x): u(0) 0, u(640,000) .80, u(810,000) .90, u(0) 0, u(90,000) .30, u(1,000,000) 1,u(490,000) .7.a Are we risk-averse, risk-seeking, or risk-neutral?Explain.b Will we prefer investment 1 or investment 2?
We now have $5,000 in assets and are given a choicebetween investment 1 and investment 2. With investment 1,80% of the time we increase our asset position by $295,000,and 20% of the time we increase our asset position by$95,000. With investment 2, 50% of the time we increaseour asset position by $595,000, and 50% of the time weincrease our asset position by $5,000. Our utility functionfor final asset position x is u(x). We are given the followingvalues for u(x): u(0) 0, u(640,000) .80, u(810,000) .90, u(0) 0, u(90,000) .30, u(1,000,000) 1,u(490,000) .7.a Are we risk-averse, risk-seeking, or risk-neutral?Explain.b Will we prefer investment 1 or investment 2?
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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Question
We now have $5,000 in assets and are given a choice
between investment 1 and investment 2. With investment 1,
80% of the time we increase our asset position by $295,000,
and 20% of the time we increase our asset position by
$95,000. With investment 2, 50% of the time we increase
our asset position by $595,000, and 50% of the time we
increase our asset position by $5,000. Our utility function
for final asset position x is u(x). We are given the following
values for u(x): u(0) 0, u(640,000) .80, u(810,000)
.90, u(0) 0, u(90,000) .30, u(1,000,000) 1,
u(490,000) .7.
a Are we risk-averse, risk-seeking, or risk-neutral?
Explain.
b Will we prefer investment 1 or investment 2?
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