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An investment is made such that the probability is 75% that RM2000 will be received at the end of one year and 20% that RM1000

An investment is made such that the probability is 75% that RM2000 will be received at the end of one year and 20% that RM1000 will be received and 5% that nothing will be received. The effective rate of interest is 20%.

a. Find the mean of the present value of this investment.

b. Find the risk premium in the interest rate.

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