9 We now have $5,000 in assets and are given a choice between investment 1 and investment
Question:
9 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?
Step by Step Answer:
Operations Research Applications And Algorithms
ISBN: 9780534380588
4th Edition
Authors: Wayne L. Winston