Question
Suppose an individual is considering an investment in which there are exactly three possible outcomes, whose probabilities and payoffs are given below: Outcome Probability Payoffs
Suppose an individual is considering an investment in which there are exactly three possible outcomes, whose probabilities and payoffs are given below:
Outcome | Probability | Payoffs |
A | 0.3 | $100 |
B | ? | $50 |
C | 0.2 | ? |
The expected value of the investment is $50. Although all the information is correct, information is missing.
1What is the probability of outcome B?
2. What is the payoff of outcome C?
3. What is the deviation of outcome A?
4. What is the standard deviation of the investment? (Note: Round your answer to two decimal places: for example 1/3=0.33; 2/3=0.67)
Taka's utility depends on his income. His utility function is specified as U(I)=I2U(I)=I2, where IIis his income. Suppose that Taka's income varies with uncertain economic conditions, and he knows that it will be 5 with 75% but will be 1 with 25%.
1. What is the expected value of Taka's income?
2. What is Taka's expected utility? (Note: just write the value)
3. If Taka has an option to get a new job, which results in a sure income of 4, will he take it?
a) No, because he is risk-loving. b) Yes, because he is risk-averse. c) No, even though he is risk-averse. d) Yes, even though he is not risk-averse. e) He is indifferent.
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