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3. You have come into a windfall of $10,000, and are considering two stocks to buy. Each stock costs $1 per stock. You think
3. You have come into a windfall of $10,000, and are considering two stocks to buy. Each stock costs $1 per stock. You think that: Stock A is high-risk, high-reward. If the company succeeds, it pays $8 per stock, but only has a 25% chance of success. If it fails, the stock price drops to zero. Stock B is low-risk, low-reward. If the company succeeds, it pays $2 per stock, but has a 75% chance of success. If it fails, the stock price drops to zero. a) If you are risk-neutral, which stock would you purchase? b) If you are risk-averse, which stock would you purchase? c) If you are risk-averse, with utility function u(x) = x, can you do better than just buying only one stock?
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