Question
Assume you are faced with the following decision tree of either investing or not investing. The decision tree shows your wealth after the different outcomes.
Assume you are faced with the following decision tree of either investing or not investing. The decision tree shows your wealth after the different outcomes. For example, your base wealth is $40,000, which is what you will have if you don't invest. If you invest, you have a 0.45 probability of gaining $50,000, which would give you a wealth of $90,000; and a 0.55 probability of losing $30,000, leaving you with a wealth of $10,000
Calculate the expected value (EV) of your wealth if you invest.
If you are risk neutral, should you choose 'Don't invest' or 'Invest'?
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