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Let us suppose you can put your money into a savings account and earn $339 in two years. Alternatively, you could put your money
Let us suppose you can put your money into a savings account and earn $339 in two years. Alternatively, you could put your money into a risky investment or into a more conservative investment. For the risky investment if the economy is good, will profit you $2000, but during a bad year, you would lose $500. For the conservative investment if the economy is good, will profit you $982, but if the economy is bad, you will lose $285. Conduct a sensitivity analysis between the savings account option and the risky investment for the probability p. Set p as the probability of the economy being good. At what value p would someone who is risk neutral be indifferent between the savings account and the risky investment.
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