5. Find the expected value assuming the risk factor is 30% and the interest rate is 15%, if you will receive $20,000 one year from today. 6. Find the expected value assuming the risk factor is 30% and the interest rate is 15%, if you will receive $20,000 two years from today.
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- Johnny is "paid" by his parents $2o if he gets a grade A, $10 if he gets a grade B, whereas he has to pay his parents back $5 if he gets a grade other than A or B. On average 20% of the grades he gets are A, and 30% are grades B. What is the expected value of what he "earns" per grade ? What is the expected value of what he "earns" at school weekly if on average he gets five grades a week ? How long should Jim save until he collects enough money to buy a pair of brand new Hi-Fi headphones that cost $225?5. Find the expected value assuming the risk factor is 30 % and the interest rate is 12% , if you will receive $20,000 one year from today.Imagine that you are a completely risk indifferent investor. A client would like topay you and gives you two options how they would be willing to pay.1. An immediate payment of $50,0002. A monthly payment of $3,000 over the next four years.You believe that the interest rate over the next four years will be 6%. Whichoption do you prefer? One of your advisors thinks that it will be rather 8%, whileanother one calculates it in a more conservative way and expects rather 4%.Would following one of them change your decision? In which way?
- Submit All Question 28 of 30 Suppose Jon decides to purchase either a long-term Treasury bond or a share of stock from a company in the Dow Jones Industrial Average. Assume that either one will behave similarly to the average security in their class, and ignore the effect of market conditions. Which security is more likely to lose most of its value in the next year after Jon purchases it? O the probabilities of major loss are the same they are both guaranteed to increase in value the stock the bond Based on historical returns, which security is likely to grow more significantly in value after Jon purchases it? the bond 8:27 PM a 46°F E 4) 12/15/202You have $1,000 that you can invest. If you buy Ford stock, you face the following returns and probabilities from holding the stock for one year: with a probability of 0.2 you will get $1,500; with a probability of 0.4 you will get $1,100; and with a probability of 0.4 you will get $900. If you put the money into the bank, in one year’s time you will get $1,100 for certain. a) What is the expected value of your earnings from investing in Ford stock? b) Suppose you are risk-averse. Can we say for sure whether you will invest in Ford stock or put your money into the bank?3. The day prior to the release of yearly profits, a stock has price equal to 1. An investor is deciding whether to buy the stock or not. The investor has a wealth equal to 10. Yearly profits can be high with probability 0.4 or low with probability 0.6. If profits are high, the price will double on the following day; if profits are low, the price will halve on the following day. If the investor does not buy the stock, her wealth remains unchanged. If the inverstors buys the stock, she will sell the stock on the following day (regardless of whether the profits are high or low) and she will accrue the relative profit or loss. In other words, she cannot hold the stock for more than one day. The investor does not discount the future and she abides von-Neumann and Morgenstern axioms. Her vNM utility index over money is u (x) = r with 3 E (0,2). • Write down the two possible gambles faced by the investor. • Does the investor buy the stock or not? Explain. • Compute the Arrow-Pratt measure of…
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