Consider the following two projects: Safe: Invest 100 and obtain 140 for certain Risky: Invest 100 and obtain 300 with probability 0.25 and 0 otherwise

1. What is the expected value of each project (no discount)? 2. Which project would you implement? Suppose now that the bank is funded with deposits in its entirety, which are rewarded at a rate (assume for simplicity, for now). The bank operates with limited liability: Only pays back if it has enough resources (i.e., profits are bounded below by ). 3. Which is the expected profit for the bank from lending to implement either project? 4. Which project would the bank grant a loan to? 5. Suppose that the bank is required to fund part of the project with its own capital. Which is the amount of capital that would make the bank change its project choice?