A risk averse decision maker should choose the option with the highest a. expected value b....
A risk averse decision maker should choose the option with the highest
| a. |
expected value |
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| b. |
expected utility |
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| c. |
EMV |
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| d. |
anchor value |
|
| e. |
None of the above |
Homework Answers
A risk averse decision maker should choose the option with the highest expected utility
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A risk averse decision maker should choose the option with the
highest
a.
expected value
b....
6. A decision maker has a vNM utility function over money of u(x) = x2. This...
6. A decision maker has a vNM utility function over money of u(x) = x2. This decision maker is (a) risk-averse. (b) risk-neutral. (c) risk-loving. (d) none of the above. 7. Consider two lotteries: • Lottery 1: The gamble (0.1, 0.6, 0.3) over the final wealth levels ($1, $2, $3). (The expected value of this lottery equals $2.2) • Lottery 2: Get $2.2 for sure. a) Any risk-averse individual will choose the first lottery. b) Any risk-averse individual will choose...
#3. Consider the following payoff table (where the payoffs are measured in dollars). State 2 81 256 .4 Value Act 1 Act 2 Probabilities State 1 16 0 .6 The modestly risk averse decision maker uses the...
#3. Consider the following payoff table (where the payoffs are measured in dollars). State 2 81 256 .4 Value Act 1 Act 2 Probabilities State 1 16 0 .6 The modestly risk averse decision maker uses the square root utility function, i.e., U(x) - x050- x. A severely risk averse decision maker uses the fourth-root utility function, i.e., V(x) - x025 #3a, which act would the modestly risk averse decision maker choose via the maximum expected utility rule? (Show your...
Question 2 (based on 15.13) Suppose you are a risk-averse decision maker with a utility function...
Question 2 (based on 15.13) Suppose you are a risk-averse decision maker with a utility function given by U(1)=1-101-2, where I denotes your monetary payoff from an investment in thousands. You are considering an investment that will give you a payoff of $10,000 (thus I 10) with probability 0.7 and a payoff of $5,000 ( 5) with probability 0.3. It will cost you $8,500 to make the investment. Should you make the investment? Why or why not거
Suppose the utility function of a decision maker for the amount of money x is given...
Suppose the utility function of a decision maker for the amount of money x is given by U(x) = x2. (a) This decision maker is considering the following two lotteries: A: With probability 1, he gains 3000. B: With probability 0.4, he gains TL 1000, and with probability 0.6, he gains TL 4000. Which of the two lotteries will the decision maker prefer? What is the certainty equivalent (CE) for lottery B? Based on the CE for B, is the...
2. (a) Explain the terms risk averse, risk loving and risk neutral with the aid of...
2. (a) Explain the terms risk averse, risk loving and risk neutral with the aid of diagrams. Jane's utility (U) depends upon her income( Y) according to the following table U(Y) 50 7 100 9.5 150 200一一 14 250 300 350 12 16.5 17 19 She has received a prize with an uncertain value. In particular, with probability 0.25 she wins $300 and with probability 0.75 she wins $100. (b) What is the expected payoff from this prize? What is...
16. A manager has to decide whether to launch product A or B. Product A has...
16. A manager has to decide whether to launch product A or B. Product A has a 0.4 probability of producing a return of $2 million over the next year and a 0.6 probability of yielding a return of $0. It is thought that product B will certainly yield a return of $1.2 million over the next year. The manager's utilities for the returns of $0, $1.2 million and $2 million are 0, 0.7, and 1.0, respectively. Which of these...
Which is riskier? Why? 2. (20pts) You have the option to choose between investments A and...
Which is riskier? Why?
2. (20pts) You have the option to choose between investments A and B represented in the following decision tree 0.5 $10000 0.2$5000 0.3 $2000 0.6 0.1 0.3 $13000 $5000 $500 a. (6pts) Assuming a risk-neutral attitude, what is the best decision? b. (5pts) Assume a risk-averse attitude with a utility function U(x) -In(x). What is the best decision?
State of Nature Decision Based on the above payoff table (positive payoff). What decision should be...
State of Nature Decision Based on the above payoff table (positive payoff). What decision should be made by the conservative (maximin criteria) decision maker? ad3 b.d2 d) d. Tie between d, and d3 None of the provided answers is correct State of Nature Decision ds Based on the above payoff table (positive payoff). If the probabilities of S. 52, and s3 are 0.5, 0.3, and 0.2, respectively, then what decision should be made using the expected value criteria? a. None...
13. Choose the Choose the option that correctly ranks the following investments from highest present value...
13. Choose the Choose the option that correctly ranks the following investments from highest present value to lo All options have the same interest rate. ent value to lowest present value. 1. A perpetuity with an annual cash flow of $100. II. An annuity due with 10 annual payments of $100. III. An ordinary annuity with 10 annual payments of $100. A. B. C. D. E. II, I, III I, II, III I, III, 11 III, II, 1
A decision-maker using the maximax criterion on the problem below would choose Alternative ________ because the...
A decision-maker using the maximax criterion on the problem below would choose Alternative ________ because the criterion value is ___________. States of nature 1 2 3 Alternative A 50 55 60 Alternative B 30 50 80 Alternative C 70 80 70 Alternative D -100 -10 140 a. A; 60 b. B; 80 c. C; 70 d. D; -100 e. D; 140
#3. Consider the following payoff table (where the payoffs are measured in dollars). State 2 81 256 .4 Value Act 1 Act 2 Probabilities State 1 16 0 .6 The modestly risk averse decision maker uses the square root utility function, i.e., U(x) - x050- x. A severely risk averse decision maker uses the fourth-root utility function, i.e., V(x) - x025 #3a, which act would the modestly risk averse decision maker choose via the maximum expected utility rule? (Show your...
Question 2 (based on 15.13) Suppose you are a risk-averse decision maker with a utility function given by U(1)=1-101-2, where I denotes your monetary payoff from an investment in thousands. You are considering an investment that will give you a payoff of $10,000 (thus I 10) with probability 0.7 and a payoff of $5,000 ( 5) with probability 0.3. It will cost you $8,500 to make the investment. Should you make the investment? Why or why not거
2. (a) Explain the terms risk averse, risk loving and risk neutral with the aid of diagrams. Jane's utility (U) depends upon her income( Y) according to the following table U(Y) 50 7 100 9.5 150 200一一 14 250 300 350 12 16.5 17 19 She has received a prize with an uncertain value. In particular, with probability 0.25 she wins $300 and with probability 0.75 she wins $100. (b) What is the expected payoff from this prize? What is...
16. A manager has to decide whether to launch product A or B. Product A has a 0.4 probability of producing a return of $2 million over the next year and a 0.6 probability of yielding a return of $0. It is thought that product B will certainly yield a return of $1.2 million over the next year. The manager's utilities for the returns of $0, $1.2 million and $2 million are 0, 0.7, and 1.0, respectively. Which of these...
Which is riskier? Why?
2. (20pts) You have the option to choose between investments A and B represented in the following decision tree 0.5 $10000 0.2$5000 0.3 $2000 0.6 0.1 0.3 $13000 $5000 $500 a. (6pts) Assuming a risk-neutral attitude, what is the best decision? b. (5pts) Assume a risk-averse attitude with a utility function U(x) -In(x). What is the best decision?
State of Nature Decision Based on the above payoff table (positive payoff). What decision should be made by the conservative (maximin criteria) decision maker? ad3 b.d2 d) d. Tie between d, and d3 None of the provided answers is correct State of Nature Decision ds Based on the above payoff table (positive payoff). If the probabilities of S. 52, and s3 are 0.5, 0.3, and 0.2, respectively, then what decision should be made using the expected value criteria? a. None...
13. Choose the Choose the option that correctly ranks the following investments from highest present value to lo All options have the same interest rate. ent value to lowest present value. 1. A perpetuity with an annual cash flow of $100. II. An annuity due with 10 annual payments of $100. III. An ordinary annuity with 10 annual payments of $100. A. B. C. D. E. II, I, III I, II, III I, III, 11 III, II, 1
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