Answered

Looking for trustworthy answers? Westonci.ca is the ultimate Q&A platform where experts share their knowledge on various topics. Get immediate answers to your questions from a wide network of experienced professionals on our Q&A platform. Connect with a community of professionals ready to provide precise solutions to your questions quickly and accurately.

An investor considers investing $20,000 in the stock market. He believes that the probability is 0.29 that the economy will improve, 0.35 that it will stay the same, and 0.36 that it will deteriorate. Further, if the economy improves, he expects his investment to grow to $26,000, but it can also go down to $14,000 if the economy deteriorates. If the economy stays the same, his investment will stay at $20,000
a. What is the expected value of his investment? Expected value
b. What should the investor do if he is risk neutral? Investor invest the $20,000
c. Is the decision clear-cut if he is risk averse?
No
Yes

Sagot :

Answer: See explanation

Explanation:

a. What is the expected value of his investment?

Based on the information given, this will be:

= (0.29 x $26000) + (0.35 x $20000) + (0.36 x $14000)

= $7540 + $7000 + $5040

= $19580

b. What should the investor do if he is risk neutral?

If the investor is risk neutral, then he should invest $20000.

c. Is the decision clear-cut if he is risk averse?

If the investor is risk averse, then it should be noted that he should not invest $20000 since the expected value of the investment will be lesser than its investment. In this case, the decision isn't clear cut if he's risk averse.

Thank you for choosing our platform. We're dedicated to providing the best answers for all your questions. Visit us again. Thanks for using our platform. We aim to provide accurate and up-to-date answers to all your queries. Come back soon. We're dedicated to helping you find the answers you need at Westonci.ca. Don't hesitate to return for more.