4. Risk aversionSuppose an investor, Erik, is offered the investment opportunities described in the table below. Each investment costs $1,000 today and provides apayoff, also described below, one year from now.OptionPayoff One Year from Now1100% chance of receiving $1,1002.50% chance of receiving $1,00050% chance of receiving $1,200350% chance of receiving $20050% chance of receiving $2,000If Erik is risk averse, which investment will he prefer?O The investor will choose option 1.O The investor will choose option 2.O The investor will choose option 3.O The investor will be indifferent toward these options.In contrast to his brother Erik, Devin is a risk lover (or exhibits risk seeking behavior). Which of the following statements is true about Devin?O Everything else remaining constant, Devin will prefer option 3.O Everything else remaining constant, Devin will prefer option 2.O Everything else remaining constant, Devin will prefer option 1.O None of these options is preferred.

Risk averse means a person who takes risk for additional return. Risk loving means a person who…

an investor, Erik, is offered the investment opportunities described in the table below. Each investment costs $1,000 today and provides a so described below, one year from now. ion Payoff One Year from Now 100% chance of receiving $1,100 50% chance of receiving $1,000 50% chance of receiving $1,200 50% chance of receiving $200 50% chance of receiving $2,000 isk averse, which investment will he prefer? The investor will choose option 1. The investor will choose option 2. The investor will choose option 3. The investor will be indifferent toward these options. t to his brother Erik, Devin is a risk lover (or exhibits risk seeking behavior). Which of the following statements is true about Devin? Everything else remaining constant, Devin will prefer option 3. Everything else remaining constant, Devin will prefer option 2. Everything else remaining constant, Devin will prefer option 1. None of these options is preferred.

an investor, Erik, is offered the investment opportunities described in the table below. Each investment costs $1,000 today and provides a so described below, one year from now. ion Payoff One Year from Now 100% chance of receiving $1,100 50% chance of receiving $1,000 50% chance of receiving $1,200 50% chance of receiving $200 50% chance of receiving $2,000 isk averse, which investment will he prefer? The investor will choose option 1. The investor will choose option 2. The investor will choose option 3. The investor will be indifferent toward these options. t to his brother Erik, Devin is a risk lover (or exhibits risk seeking behavior). Which of the following statements is true about Devin? Everything else remaining constant, Devin will prefer option 3. Everything else remaining constant, Devin will prefer option 2. Everything else remaining constant, Devin will prefer option 1. None of these options is preferred.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Suppose an Investor, Erik, is offered the Investment opportunities described in the table below. Each Investment costs $1,000 today and provides a payoff, also described below, one year from now. Option Payoff One Year from Now 1 100% chance of receiving $1,100 2 50% chance of receiving $1,000 50% chance of receiving $1,200 3 50% chance of receiving $200 50% chance of receiving $2,000 If Erik is a risk neutral investor, which investment will he prefer? O Erik will be indifferent toward these options. Erik will choose option 1. Erik will choose option 2. Erik will choose option 3. In contrast, Erik's brother, Devin, is risk averse. Which of the following statements is true about Devin? Everything else remaining constant, Devin will prefer option 1. Everything else remaining constant, Devin will prefer option 2. ○ Everything else remaining constant, Devin will prefer option 3. O None of these options is preferred.
Suppose an investor, Erik, is offered the investment opportunities described in the table below. Each investment costs $1,000 today and provides a payoff, also described below, one year from now. Option Payoff One Year from Now 1 100% chance of receiving $1,100 2 50% chance of receiving $1,000; 50% chance of receiving $1,200 3 50% chance of receiving $200; 50% chance of receiving $2,000 If Erik is risk averse, which investment will he prefer? The investor will choose option 1. The investor will choose option 2. The investor will choose option 3. The investor will be indifferent toward these options. Which kind of stock is most affected by changes in risk aversion? High-beta stocks Low-beta stocks All stocks are affected the same, regardless of beta. Medium-beta stocks
You are thinking about purchasing an investment from Get-Rich-Quick Investmemnt company. If you buy the investment, you will receive $50 every month for five(5)years. Payment will be made at the end of each month. If your required rate of return is 9% how much should you be willing to pay for this investment? Group of answer choices $4,632.87 $2,735.25 $2,525.10 $2,408.67
K Interest rate (with changing years). Keiko is looking at the following investment choices and wants to know what annual rate of return each choice prod a. Invest $420.00 and receive $837.57 in 12 years. b. Invest $2,800.00 and receive $11,555.99 in 18 years. c. Invest $32,787.94 and receive $120,000.00 in 24 years. d. Invest $32,538.78 and receive $1,300,000.00 in 35 years. a. What annual rate of return will Keiko earn if she invests $420.00 today and receives $837.57 in 12 years? % (Round to two decimal places.)
Investor X has 7,000 to spend on the following three projects. Use the AW method to determine which of these independent investments are financially acceptable at 6% per year compounded monthly interest rate. Lifelong probl so Use CC=AW/I to get present worth. Option A B с Installed Cost 4500 3000 2200 Return per month 220 200 140
8) Special Retirement PlanYou set up a retirement plan where you will invest $20,000 per year in an account with a guaranteed rate of return of ? = 0.05. The plan requires that you start investing immediately at year t=0, and make fifteen (15) additional payments of $20,000 in years t=1, t=2, ..., t=10. You make 11 investments in total. a. What will be the value of this stream of investments in year t=50? b. What is the maximum you can withdraw per year over the twenty (20) year period from t=51, t=52, ..., t=70? You have to withdraw the same amount each year. c. What is the maximum that you can withdraw per year forever if you start to make withdrawals in year t=51. You have to withdraw the same amount each year. 19)
An investor has $1000 available for a 1-year investment. The investor is considering the following three options:Option APossible return 30%, 20%, 0%, -20%Probability 25%, 40%, 20%, 15%Option BPossible return 50%, 30%, 0%, -40%Probability 15%, 50% ,20% ,15% Option CGuaranteed return 10%Probability 100%i. Based on the expected returns, which of these options should the investor choose?ii. Compute the standard deviations for Option A and Option B. Which one of options A, B, and C has the least risk (i.e. the smallest standard deviation), which one has the highest risk? What can you say about the relationship between the expected returns and the risks of financial assets in the normal situation?
Your insurance agent is trying to sell you an annuity that costs $80,000 today. By buying this annuity, your agent promises that you will receive payments of $445 per month for 30 years. What is the rate of return expressed as an APR on this investment? Multiple Choice O 4.91% 5.32% 4.43% 5.23%
Risk aversion Erik is an investor with $5,000 available for investment. He has the following three investment possibilities from which to choose: Option Scenarios 1 Keep the $5,000 in cash for one year. 2 Invest in a friend’s business with a 50% chance of getting $10,000 after one year and a 50% chance of getting nothing. 3 Invest in a relative’s business with a 30% chance of getting $15,000 after one year, 20% chance of getting $2,500 after one year, 50% chance of getting nothing. If Erik is indifferent about these three investment options, and he thinks that they are worth the same to him. Therefore, which of the following statements is true about Erik? He is risk-neutral. He is risk-averse. He is risk-loving. None of these descriptions is accurate. Later, while examining the same investment alternatives, Erik’s brother, Devin, clearly expressed a preference for option 1. Which of the following…
Your friend offers you an investment opportunity that would yield $100 per year for the next 3 years. Using a discount rate of 10%, decide whether this is a good investment opportunity. What is the present value of this investment? a. $200.05 b. $250 c. $248.68 d. 258.20
Assume you won the lottery and that you have two options for receiving the prize money. You can receive $300,000 today or receive payments of $2,700 a month for 20 years. If you can make a nominal 8% return, which option should you take and why? (Hint: To compare investments involving cash flows, you always compare the present value of the future cash flows to identify the most attractive option.) Multiple Choice The $2,700 per month. It is better to have payments spread out than receive a lump sum. The lump sum today. The present value of the lump sum is greater than the payments. The $2,700 per month. The present value of the payments is greater than the lump sum. The lump sum today. It has greater earnings potential. 27
Check My Work eBook An investment will pay $150 at the end of each of the next 3 years, $250 at the end of Year 4, $400 at the end of Year 5, and $600 at the end of Year 6. If other investments of equal risk earn 8% annually, what is its present value? Its future value? Do not round intermediate calculations. Round your answers to the nearest cent. Present value: $ Future value: $

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