Question Completion Status QUESTION 6 Part A Ryan is a risk adverse investor. He has $40,000 to invest for one year. He has two choices: Choice #1: Buy shares of Tesla Inc., which can payoff: $10,000 if Tesla is in a high payoff state (H) and, $4.000 If Tesla is in a low payoff state (L) Choice #2: Buy shares of Apple Inc.: with which can payoff: $10,500 if Apple is in a high payoff state (H) and $2,000 if Apple is in a low payoff state (L) Ryan's prior probabilities on the future state of Tesla and Apple are both: P(H)= 0.80 PIL) - 0.20 Ryan's utility is equal to the square root of the amount of the payoff. (Risk adverse) Required: (Show all your calculations) (Ignore initial investment of $40,000) a. Which choice of investment would Ryan prefer; Shares of Tesla or Apple? 14 marks) Part B Before making the investment, Ryan decides to become more informed. He studies the management discussion and analysis (MD) of each company from their latest annual report. He knows that careful evaluation of the quality of the discussion will provide inside evidence as to future expected cashflows. Companies with high expectations will usually provide better disclosure. Ryan who is an expert on GAAP and current MDEA guidelines knows these probabilities below. PELL}-0.2 PCGL/H) -0.7 After reading the current MDXAS, Ryan discovers that Tesla has good disclosure (GD) and Apple has poor disclosure (PD). b. Indicate which choice of shares Ryan now prefer? (6 marks) Part Ryan tells you his decision, and you suggest that it may be a good idea to invest in both Tesla and Apple Why would you make this suggestion? 14 marks) Question Completion Status QUESTION 6 Part A Ryan is a risk adverse investor. He has $40,000 to invest for one year. He has two choices: Choice #1: Buy shares of Tesla Inc., which can payoff: $10,000 if Tesla is in a high payoff state (H) and, $4.000 If Tesla is in a low payoff state (L) Choice #2: Buy shares of Apple Inc.: with which can payoff: $10,500 if Apple is in a high payoff state (H) and $2,000 if Apple is in a low payoff state (L) Ryan's prior probabilities on the future state of Tesla and Apple are both: P(H)= 0.80 PIL) - 0.20 Ryan's utility is equal to the square root of the amount of the payoff. (Risk adverse) Required: (Show all your calculations) (Ignore initial investment of $40,000) a. Which choice of investment would Ryan prefer; Shares of Tesla or Apple? 14 marks) Part B Before making the investment, Ryan decides to become more informed. He studies the management discussion and analysis (MD) of each company from their latest annual report. He knows that careful evaluation of the quality of the discussion will provide inside evidence as to future expected cashflows. Companies with high expectations will usually provide better disclosure. Ryan who is an expert on GAAP and current MDEA guidelines knows these probabilities below. PELL}-0.2 PCGL/H) -0.7 After reading the current MDXAS, Ryan discovers that Tesla has good disclosure (GD) and Apple has poor disclosure (PD). b. Indicate which choice of shares Ryan now prefer? (6 marks) Part Ryan tells you his decision, and you suggest that it may be a good idea to invest in both Tesla and Apple Why would you make this suggestion? 14 marks)