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A down on his luck real estate investor in Ypsilanti is considering three alternative investments: a motel, a restaurant, or a theater. Profits from the
A down on his luck real estate investor in Ypsilanti is considering three alternative investments: a motel, a restaurant, or a theater. Profits from the motel or restaurant will be affected by the availability of gasoline and the number of tourists; profits from the theater will be relatively stable under any conditions. The following payoff table shows the profit or loss that could result from each investment and the probability of each gasoline availability situation: Gasoline Availability Shortage Stable Supply Surplus Motel Minus $8000 $15,000 $20,000 Restaurant 2000 8000 6000 Theater 6000 6000 5000 Probability .2 4 4 Say the down on his luck investor has assigned the following utilities to each dollar value listed in the problem above: Gasoline Availability Shortage Stable Supply Surplus Motel 0 9.75 10 Restaurant 4.1 8 6.5 Theater 6.5 6.5 5.7 Probability .2 .4 .4 f-the standard deviation of an investment is sometimes used as a measure of risk for the investment. In the context of this problem how do you reconcile the down on his luck investor's attitude toward risk and his choosing the option with the highest expected utility
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