Problem 4. (30 Pts). Suppose you are asking two people, Oscar and Mildred, who gave the following responses to lottery questions: Given a 50-50 chance between the Lottery outcome #1 and Lottery outcome #2, Oscar stated that he found it equivalent to the dollar value in the third column, and Mildred stated that she found it equivalent to the dollar value in the last column. All amounts are in dollars. Mildred Lottery outcomel 300 2500 Lottery Outcome 2 -150 -1250 Oscar 0 0 You will solve a problem using the utility function for each person. Assume that each person has a risk-averse exponential utility function. Suppose that Oscar and Mildred are each offered a choice of investments for $1000: A CD paying 3% per year, a bond fund, and a stock fund. The bond and stock fund pay as shown after 1 year: Stock Market is: Up Same Down Probability: .25 .6 .15 Bond Fund $1015.75 $1042.50 $1030.25 Stock Fund $4200 $1125 $250 CD 1030 a. What is the best investment for Oscar? What is his expected utility? (15 pts) b. What is the best investment for Mildred? What is her expected utility? (15 pts) Problem 4. (30 Pts). Suppose you are asking two people, Oscar and Mildred, who gave the following responses to lottery questions: Given a 50-50 chance between the Lottery outcome #1 and Lottery outcome #2, Oscar stated that he found it equivalent to the dollar value in the third column, and Mildred stated that she found it equivalent to the dollar value in the last column. All amounts are in dollars. Mildred Lottery outcomel 300 2500 Lottery Outcome 2 -150 -1250 Oscar 0 0 You will solve a problem using the utility function for each person. Assume that each person has a risk-averse exponential utility function. Suppose that Oscar and Mildred are each offered a choice of investments for $1000: A CD paying 3% per year, a bond fund, and a stock fund. The bond and stock fund pay as shown after 1 year: Stock Market is: Up Same Down Probability: .25 .6 .15 Bond Fund $1015.75 $1042.50 $1030.25 Stock Fund $4200 $1125 $250 CD 1030 a. What is the best investment for Oscar? What is his expected utility? (15 pts) b. What is the best investment for Mildred? What is her expected utility? (15 pts)