Question
An investor with a total wealth of $100 is faced with the following opportunities. First, he may invest $100 now and receive $144 if there
An investor with a total wealth of $100 is faced with the following opportunities. First, he may invest $100 now and receive $144 if there are good times but receive $64 if there are bad times. The investor estimates that good times happen with 50% probability. He can also buy an investor newsletter whether good times or bad times with occur.
(a) Draw the decision tree that illustrates the options available to the investor and the payoffs to the different options. Define P as the price of the newsletter.
(b) If the investor is risk-averse with utility U(M) = M0.5 , where M is income, how much would this investor be willing to pay for the subscription to the newsletter?
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