Question
An investment of $10,000 in a high risk venture has a 50-50 chance over the next year of increasing to $14,000 or decreasing to $8000.
An investment of $10,000 in a high risk venture has a 50-50 chance over the next year of increasing to $14,000 or decreasing to $8000. Thus the net return can be either $4000 or -$2,000. Two investors A and B have exhibited the following indifference probabilities:
Indifference Probabilities
Net return ($) Investor A Investor B
-2000 0.00 0.00
-1000 .70 .10
0 .80 .20
1000 .85 .30
2000 .90 .50
3000 .95 .60
4000 1.00 1.00
Graph the utility functions for investors A and B and categorize each investor as either risk-averse person or a risk seeker.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started