n investor has utility function U = 10 + 5P – 0.02P2. What is the expected utility of the following investment option? Probability Payoff (P) 0.4 10 0.3 20 0.2 30 0.1 40
Q: One investment option will give a guaranteed income of $100,000. An alternative option is risky -…
A: Risk-averse: - it is a strategy or the nature of the person of avoiding risk involved in capital…
Q: Dr. Gambles has a utility function given as U(w)=In(w). Due to the pandemic affecting his consulting…
A: We are going to find Expected utility with insurance and without insurance to calculate the maximum…
Q: A new company is offering its shares for sale in an initial public offering (IPO) through an…
A:
Q: Jen is choosing a portfolio. For this choice, she is an expected utility maximizer. We fix the…
A: Wants satisfying of the commodity is known as utility , higher the utility higher the satisfaction ,…
Q: A risk averse individual prefers a certain outcome to an uncertain outcome with the same expected…
A: To find : Whether the statement is true or false.
Q: Five of ten people earn $0, four earn $100, and one loses $100. What is the expected payoff? What is…
A: An average is the sum of the earnings divided by the number of observations. In this case, ten…
Q: Q2. (i) Consider a risk averse investor who must decide how much of his initial wealth w to put into…
A: Decreasing absolute risk aversion represents that when wealth increases the amount invested in risky…
Q: You need to hire some new employees to staff your startup venture. You know that potential employees…
A: Given information Employee Value Probability $65,000 0.1 $78,000 0.1 $91,000 0.1…
Q: A consumer has the following utility function u(x)= root x where x is the consumer’s total wealth.…
A: A utility function is a representation used to describe personal preferences for products or…
Q: The expected value of an investment: a. Is what the owner will receive when the investment is sold…
A: Expected value refers to anticipating future value for investment. To calculate the expected value,…
Q: Why does the risk-adjusted discount rate reduce the investment's appeal?
A: Risk adjusted discount rate refers to the summation of risk free rat and the risk premium. Risk…
Q: What is the Risk-Adjusted Discount?
A: The risk adjusted discount is calculated by using the formula as follows:
Q: utilit
A: Utility function is an important concept which measures the preferences over a set of services and…
Q: Ebony Reigns owns a studio that would cost ¢ 120,000 to replace should it ever be destroyed by fire.…
A: Given information Ebony Reign Owns a studio Cost of replacement when fire destroys it=120000 25%…
Q: efer to the following table showing the probability distribution of payoffs from an activity to…
A: Ans. The expected value of payoffs is the sum of the product of payoffs and their respective…
Q: A risk averse individual will always choose the safe but less profitable activity instead of the…
A:
Q: Consider a lottery with three possible outcomes: $100 will be received with probability .1, $50 with…
A: 1) Expected value of lottery is given as E(U)= p1x1+p2x2+p3x3 Where pi is the probability of that…
Q: True or False: A risk-preferring person will always bet, no matter how much the odds are against…
A: Answer is given below
Q: Studies have concluded that a college degree is a very good investment. Suppose that a college…
A: The (Expected value) EV is an EV for investment at the serval point in the next year). In-Stat.…
Q: You are considering two portfolios. Portfolio A has an expected return of 15% and a standard…
A: A portfolio's certainty equivalent is the rate of return on a risk-free investment at which prudent…
Q: An investor is considering three strategies for a $1,000 investment. The probable returns are…
A:
Q: Given the following information, what is the standard deviation of the returns on a portfolio that…
A: According to the given information:
Q: 2. Consider a trader with initial fund given by To holding q shares of stock i is C(q) = 10 + q².…
A: Introduction initial fund has given 15 and the transaction cost of the traders has given as C(q) =…
Q: Suppose that a person maximizes his expected utility, with the utility function given by v(z) = z12.…
A: We have two value of Z with equal probability. Which means Z can take 2 different values with…
Q: The beta of an active portfolio is 1.45. The standard deviation of the returns on the market inde is…
A: Answer; Option (e) is Correct
Q: Suppose that a decision is faced with three decision alternatives and four states of nature. The…
A: The matrix looks like: S1 S2 S3 S4 Α1 18 12 15 8 Α2 15 14 10…
Q: Your software development company is considering investing in a new mobile app. If it goes viral…
A: NPV:- Net present value is the difference between the current worth of cash inflows and withdrawals…
Q: In a game, there are three values 1, 000, 2.500 and 5,000 and the cost of the game is 1, 500 . If…
A: Expected Value refers to the anticipated value for investment at some point in the future period. it…
Q: 1. George maximizes expected utility and he has a von-Neumann-Morgenstern utility function u (c) =…
A: Utility = c1/2 Initial Wealth = $1000 success rate = 9% If successful then payoff = $100,000 Payoff…
Q: Describe the relationship between Expected Value, Expected Utility and Certain Equivalent (at least…
A: The expected value is the anticipated value of anything that a person expects. In probability…
Q: You have been hired as a portfolio manager for a fancy hedge fund. Your first job is to invest…
A: Safe assets are assets that, on their own, do not carry a high risk of loss across all market…
Q: 1) company. If the company does well, the investor will make a 200% profit in her investment, but if…
A: Profitability: Profitability is the basic objective of all commercial endeavors. The firm will not…
Q: A man purchased a $22,500, 1-yr term-life insurance policy for $695. Assuming that the probability…
A: The expected return (or expected gain) on a financial investment is the expected value of its return…
Q: Exercise 3: Risky Investment Charlie has von Neumann-Morgenstern utility function u(x) = ln r and…
A: "Expected utility" is an economic term that describes the utility that an entity or the aggregate…
Q: Assume you are faced with two decision alternatives and two states of nature whose profit payoff…
A: "Since you have asked a question with multiple sub-parts, we will solve the first three sub-parts…
Q: A risk-averse investor will: a. Always accept a greater risk with a greater expected return b. Only…
A: Risk-averse people are those who prefer not to take any risk or want to reduce the uncertainty.
Q: Elizabeth has decided to form a portfolio by putting 30% of her money into stock 1 and 70% into…
A: Standard deviation: It means a measure of how spread out numbers are
Q: Rice farming is risky and generates expected income of $100. The certainty equivalent associated…
A: Risk-averse: - it is a strategy or the nature of the person of avoiding risk involved in capital…
Q: The beta of an active portfolio is 1.45. The standard deviation of the returns on the market inde>…
A: here calculating the standard deviation of the returns on the active portfolio as follow
Q: If the risk-free rate is 3 percent and the risk premium is 5 percent, what is the required return?
A: The required return = return on risk free invested + risk premium So if the risk premium is 5…
Q: A risk-averse investor will: Answer a. Always accept a greater risk with a greater expected return…
A: Risk-averse describes investors who choose preservations of capital over the potential for a…
Q: A moderately risk-averse investor has 50% of her portfolio invested in stocks and 50% in risk-free…
A: A budget imperative addresses every one of the blends of labor and products that a customer might…
Q: (a) Given a utility function of an individual is U(x) = x² - 4x, determine his risk attitude. (b)…
A: For the given utility function U(x) = 1/2X2 -4X we can find out the risk measurement using the…
Q: expected utility maximiser owns a car worth £60000£60000 and has a bank account with £20000£20000.…
A: A normal utility maximiser is a hypothetical specialist who thinks about its activities, processes…
Q: A drug company is considering investing $100 million today to bring a weight loss pill to the…
A: Investment made= $100 million Probability of selling pills at high price= 0.5 Profit made from pills…
Q: Show that an investor with a quadratic utility function ranks portfolios only on the basis of the…
A: Utility is a measure of relative satisfaction that an investor derives from totally different…
An investor has utility function U = 10 + 5P – 0.02P2. What is the expected utility of the following investment option?
|
Probability |
Payoff (P) |
|
0.4 |
10 |
|
0.3 |
20 |
|
0.2 |
30 |
|
0.1 |
40 |
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
- Mr Phiri has K10,000 in his account. He is considering investing in a project which has 70 % probability of earning a profit of K10,000 and a 30% probability of incurring a loss of K10,000. His utility at the moment is 20 utiles with the current K10,000. With K20, 000 his utility would be 25 utiles and with K0 his utility would be zero.a) What is the expected profit of the project? b) What is the expected marginal utility of the project? Is Mr Phiri likely to invest in the project? Mr Sinkala also has K10,000 from which he derives 20 utiles. However, Mr Phiri derives 15 utiles from the profit of K10,000.c) What is the expected marginal utility for Mr Sinkala? d) How can you describe Mr Phiri and Mr Sinkala in terms of their attitude towards risk?Mr Phiri has K10,000 in his account. He is considering investing in a project which has 70 % probability of earning a profit of K10,000 and a 30% probability of incurring a loss of K10,000. His utility at the moment is 20 utiles with the current K10,000. With K20, 000 his utility would be 25 utiles and with K0 his utility would be zero. a) What is the expected profit of the project? b) What is the expected marginal utility of the project? Is Mr Phiri likely to invest in the project? Mr Sinkala also has K10,000 from which he derives 20 utiles. However, Mr Phiri derives 15 utiles from the profit of K10,000. c) What is the expected marginal utility for Mr Sinkala? d) How can you describe Mr Phiri and Mr Sinkala in terms of their attitude towards risk?An aggressive investment in Industry 4.0 next-generation technology has the potential to save your company $7M if it is very successful, or $3M if it is moderately successful, but it will cost $2M if it fails. The relative risk for the project is $1.25M. The company has a risk tolerance of $1 million and has assigned a utility value of .777 based on an exponential utility function for this investment. What is the value of a safe investment that the company would just as soon choose rather than investing in the IT project? A. $2M B. $1.5M C. 52.75 D. $1.25M
- Guy Fieri has purchased a significant plot of land in Northwest Ohio for his newest venture: FlavorTownship. This hub for mind-boggling flavor and entertainment is a strictly for-profit operation. Guy would like to keep Flavor Township open all year-round, but due to Ohio weather the following are the probabilities of when it will be open: |- 30% chance it is open 300 days a year |- 55% chance it is open 325 days a year |- 15% chance it is open 350 days a year Flavor Township will expect to host 14,000 people each day that it is open and expects an average revenue of $45 per visitor. This paradigm-shifting landmark will cost $420,000,000 to start the investment and will require annual costs (food, employees, etc.) of $115,000,000. Every 3 years, Flavor Township will undergo necessary maintenance that will cost $22,000,000. If the expected life of Flavor Township is 15 years and a 16% return is expected, what is the expected NPV of this project?Q2. (i) Consider a risk averse investor who must decide how much of his initial wealth w to put into a risky asset. The risky asset can have any of the positive or negative rates of return r with probability density function f(r). If ß is the amount of wealth to be put into the risky asset, final wealth under rate of return r will be (w B) + (1+r)ß = w+ ßr. The investor's problem is to choose 3 to maximize the expected utility of wealth. We can write this formally as the following single-variable optimization problem (1) Suppose we have interior optimal 3* falls in (0, w), which is determined by the following first order condition: Ju'(w + ßr)rf(r)dr = 0. (2) Define A(w) as a measure of absolute risk aversion. Please show that if u(.) displays decreasing absolute risk aversion (DARA), i.e. A(w) decreases with w, then the risky asset must be a "normal" good, i.e. 3* increases with w. [Hint: Please read Example 2.6 in Jehle and Reny.] max fu(w + Br)f(r)dr s.t.: 0 ≤ B ≤w. B u" (w) = u'…You decide to invest in a portfolio consisting of 21 percent Stock X, 48 percent Stock Y, and the remainder in Stock Z. Based on the following information, what is the standard deviation of your portfolio? State of Economy Normal Boom Probability of State of Economy .84 .16 Return if Stat Stock X Stock Y 10.20% 3.60% 17.50% 25.50%
- A 28- year- old man pays $158 for one year life insurance policy with coverage of $110,000. If the probability he will live through the year is 0.9994, what is the expected value for the insurance policy?Tasha is planning to invest in a farming project in 2022, but has a reservation given the different forecast (declined (D),the average (A) and takeoff (T)of the economy. She uses the following to guide her decision making. (i) there is 25% chance she will invest if there is a forecast of declined (ii) there is a 75% chance she will invest if there is a forecast of average growth and (iii) there is a 55% chance of investing if there is a forecast that economy will takeoff. Tashanna believes that for 2022 there is a 20% chance of decline and a 40% chance of average growth and a 40% chance the economy will take off. Based on these probabilities what is the chance that Tattiana will invest in the farming project if the stated forecast hold?An investor allocates $30,000 and $50,000 to two assets (A1 and A2). These assets generate 5% and -4.5% rate of returns, respectively. She allocates the remaining 50% of her portfolio to an asset (A3), which provides 4.5% rate of return. Calculate the portfolio's rate of return.
- 1. A person who is 55 year old bought a PHP 2,000,000 life insurance policy at a cost of PHP 1.2 M and has a probability of 0.978 of living to age 56, find the expectation of the policy. 2. nPn-r = ? (Permutations)Describe the relationship between Expected Value, Expected Utility and Certain Equivalent (at least 150 words)Landberg Inc. is considering a project which would require a $1.85 million after-tax investment today (t = 0). The after-tax cash flows the factory generates will depend on whether the state imposes a new property tax. There is a 45% probability that the tax will pass. If the tax passes, the factory will produce after-tax cash flows of $40,000 at the end of each of the next 5 years. There is a 55% probability that the tax will not pass. If the tax does not pass, the factory will produce after-tax cash flows of $800,000 for the next 5 years. The project has a WACC of 10%. If the factory is unsuccessful, the firm will have the option to abandon the project 1 year from now if the tax passes. If the factory project is abandoned, the firm will receive the expected $40,000 cash flow at t = 1, and the property will be sold netting $900,000 (after taxes are considered) at t = 1. Once the project is abandoned, the company would no longer receive any cash inflows from it. What is the project's…