2 Consider the two investments listed below with possible outcomes and probabilities: INVESTMENT (in $1000) SAFE RISKY INVESTMENT+ AMOUNT 40€ 40€ GOOD SCENARIO OUTCOME 45 80+ AVERAGE SCENARIO PROB OUTCOME 0.40 0.40€ 42° 45° BAD+ SCENARIO PROB OUTCOME 0.20€ 0.20 35€ 10€ PROB 0.40€ 0.40€ a) Suppose I have utility function U(*) = (x)². What is the expected utility from each investment? b) Which investment will I choose, if any? Show and explain your work and provide the intuition. c) What is the value of the risk premium for the SAFE investment? Show and explain your work and provide the intuition. d) What is the value of the risk premium for the RISKY investment? Show and explain your work and provide the intuition. P 13 P

2 Consider the two investments listed below with possible outcomes and probabilities: INVESTMENT (in $1000) SAFE RISKY INVESTMENT+ AMOUNT 40€ 40€ GOOD SCENARIO OUTCOME 45 80+ AVERAGE SCENARIO PROB OUTCOME 0.40 0.40€ 42° 45° BAD+ SCENARIO PROB OUTCOME 0.20€ 0.20 35€ 10€ PROB 0.40€ 0.40€ a) Suppose I have utility function U(*) = (x)². What is the expected utility from each investment? b) Which investment will I choose, if any? Show and explain your work and provide the intuition. c) What is the value of the risk premium for the SAFE investment? Show and explain your work and provide the intuition. d) What is the value of the risk premium for the RISKY investment? Show and explain your work and provide the intuition. P 13 P

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

Attempt only if you can solve all parts correct ASAP I'll upvote your answer if you will not solve all parts I'll downvote your answer
Please help me to solve this question without using excel
For the net cash flow and cumulative cash flows shown, the value of x is nearest: (a) $−8,000 (b) $−16,000 (c) $16,000 (d) $41,000 Year 1 2 3 4 5 Net Cash Flow, $ +13,000 −29,000 −25,000 50,000 x CCF, $ +13,000 −16,000 −41,000 +9000 +1000
At what annual interest rate will $1,200 invested today be worth $2.500 in 12 years'?(a) 6.5%(b) 7.2%(c) 9.02%(d) 5.8%
10
Your friend withdrew $630,315 from an account into which she had invested $350,000. If the account paid interest at 4% per year, she kept her money in the account for how many years? (a) 1.8 years (b) 6.5 years (c) 12.5 years (d) 15 years
Could you also answer part (d) (e) (f). Greatly Appreciated!
3
How much will Sonja have in a savings account 12 years from now if she deposits $3000 now and $5000 four years from now? The account earns interest at a rate of 10% per year. (a) $10,720 (b) $9,415 (c) $20,133 (d) $15,630 (e) Greater than $22,000
An investment project costs $100,000. ll is expected to have an annual net cash flow of $40,000 for 5 years. What is the project's payback period?(a) 2.5 years(b) 3.5 year(c) 4.5 years(d) 5 years
Which of the following 1-year investments has the lowest rate of return? (a) $24,500 that yields $2222 in interest, (b) $82,000 that yields $8240 in interest, or (c) $62,500 that yields $5000 in interest .
Please answer by showing the HAND WRITTEN PROCESS!!