Question

An investment of $10,000 in a high risk venture has a 50-50 chance over the next year of

increasing to $14,000 or decreasing to $8000. Thus the net return can be either $4000 or

-$2,000. Two investors A and B have exhibited the following indifference probabilities:

Indifference Probabilities

Net return ($) Investor A Investor B

-2000 0.00 0.00

-1000 .70 .10

0 .80 .20

1000 .85 .30

2000 .90 .50

3000 .95 .60

4000 1.00 1.00

Graph the utility functions for investors A and B and categorize each investor as either

risk-averse person or a risk seeker.

Answer 1