Question
A and B have a starting salary of $75 000 which is subject to a 4% increase every year. They will also have to take
A and B have a starting salary of $75 000 which is subject to a 4% increase every year. They will also have to take 3 extra qualification quizzes. For every quiz passed, they will have a 15% salary increase at the beginning of the next year after they pass in addition to the normal annual increase (thus total increase will be 19%). The probability of passing any particular quiz is 30% and is independent of previous quizzes/attempts they make. Only one quiz can be attempted every year and once they pass all three quizzes no more attempts will be made.Salary payments are made at the end of every month. Of these salary payments only 30% will be invested. The other 70% will be used for monthly expenditures.
A and B have the choice of three options on how to invest their money. These are: (a) Option 1: 100% in zero coupon government bonds (b) Option 2: 60% in a stock portfolio and 40% in zero coupon government bonds.(c) Option 3: 100% in Multi-asset investment fund.
1.Suppose they both pass their exams in 2023, 2025 and 2027. Project A and B's salaries for the next 10 years by providing all monthly payments starting from January 2022 to the final payment in December 2031.
2.A is most interested in option 2 while B is most interested in option 3. What can you infer about their respective risk preferences? Explain your conclusions.
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