a) (3)) Consider two investments X and Y, where X pays $0 and $10 with equal...

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a) (3)) Consider two investments X and Y, where X pays $0 and $10 with equal probability and Y pays 0 with probability 0.75 a

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Answer 1

Answer #1

1.
U(X)=0.5*(0)^2+0.5*(10)^2=50.00000

U(Y)=0.75*(0)^2+0.25*(20)^2=100.00000

Choose Investment Y

2.
U(X)=0.5*0+0.5*10=5.00000

U(Y)=0.75*0+0.25*20=5.00000

Indifferent between Investment X and Y

3.
U(X)=0.5*(1-e^(-0/10))+0.5*(1-e^(-10/10))=0.31606

U(Y)=0.75*(1-e^(-0/10))+0.25*(1-e^(-20/10))=0.21617

Choose Investment X

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Answer 2

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