Homework Answers
a) The final wealth of investor from investment in a successful project = $1000000
Final wealth of investor from investment in a savings account = 450000(1+.05) =472500
b) The net returns of investor from investment in a successful project = Final wealth - initial wealth
= $1000000-$450000= $550000
The net returns of investor from investment in a savings account = $472500-$450000= $22500
c) Expected wealth of investor from investment in a project = $1000000*p +(1-p)*0
= $1000000*1/2+1/2*0
= $500000
Expected wealth from investment in a savings account = $472500
Therefore, the investor will choose investment in the project
d) Expected net returns from investment in a project = 1/2*550000+1/2*0 = $275000
Expected net returns from investment in a savings account = $22500
Therefore, investor will invest in project.
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