Ryan Smith is a risk adverse investor. He has $30,000 to invest for one year. He has two choices:

Choice #1:Buy shares of APPLES (AAPL); which can payoff

• $ 400if AAPL is in a high payoff state (H) and
• $ 0if AAPL is in a low payoff state (L)

Choice #2: Buy a GIC with a guaranteed payoff of $ 196

Ryan's prior probabilities on the future state of AAPL are:

P(H)= 0.60

P(L) = 0.40

Ryan's utility is equal to the square root of the amount of the payoff.

Required: (Show all your calculations)

a) Which choice of investment would Ryan prefer; Shares of AAPL or GIC? (2 marks)

b) Before making the investment Ryan decides to become more informed. He studies the annual report of AAPL that has just been released and discovers that AAPL has had a Good year and the financial statement show "Good news". Ryan discusses his findings with an investment advisor who comes up with the following probabilities.

P(GN/L) = 0.2

P(GN/H) = 0.9

Indicate which choice of investment will Ryan now prefer?(4 marks)

c) Prepare the information system for this question. (1 marks) Is this a Perfect or Fully-Informative Information System? Yes or No (1 marks)

d) Prepare an example of an Non-Informative Information System? (2 marks)