An investor is asked to choose between two investments with the same initial cost of $5: Investment A: there is a 0.01% chance of earning $45,000 and a 99.99% chance of earning $0 Investment B: there is a 100% chance of earning $5 The investor has a strong preference for investment A. (7 Marks)

 

 (2) An investor believes that the decrease in value of her security is not a loss until it is realized (i.e., when she sells the security) 

 

3) An earnings announcement is an official public statement of a company's profitability, usually issued on a quarterly basis. There are two ways a firm could announce its earnings per share (EPS) in quarter 2: Statement 1 "Our EPS in quarter 2 is $1.11, compared to $1.21 forecasted by analysts." Statement 2 "Our . EPS n quarter 2 is $1.11, compared to $1.01 in quarter 1." Researchers find that investors respond more positively to statement 2 compared to statement 1.

 

Use the  theories from behavioral finance