A risk-averse investor will: a. Always accept a greater risk with a greater expected return b. Only invest in assets providing certain returns c. Sometimes accept a lower expected return if it means less ri d. Never accept lower risk if it means accepting a lower expected return
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A risk-averse investor will:
a. Always accept a greater risk with a greater expected return
b. Only invest in assets providing certain returns
c. Sometimes accept a lower expected return if it means less ri
d. Never accept lower risk if it means accepting a lower expected return
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- Risk can be defined as the effects of uncertainty on objectives and often manifests itself in risk to property and ownership, operations and ….. of funds. A) flow B) outflowA plaintiff believes that there is a 30% chance that he will winIf he wins, he will gain $50,000. It costs him $5000 in non‐recoverable litigation costs to take the case to court. If the plaintiff is risk‐neutral, which of the following is true? A) The plaintiff will take the case to court with an expected net‐gain of $10,000 B) The plaintiff will take the case to court with an expected net‐gain of $15,000 C) The plaintiff will not take the case to court because he is afraid of losing. D) None of the aboveMr Phiri has K10,000 in his account. He is considering investing in a project which has 70 % probability of earning a profit of K10,000 and a 30% probability of incurring a loss of K10,000. His utility at the moment is 20 utiles with the current K10,000. With K20, 000 his utility would be 25 utiles and with K0 his utility would be zero. a) What is the expected profit of the project? b) What is the expected marginal utility of the project? Is Mr Phiri likely to invest in the project? Mr Sinkala also has K10,000 from which he derives 20 utiles. However, Mr Phiri derives 15 utiles from the profit of K10,000. c) What is the expected marginal utility for Mr Sinkala? d) How can you describe Mr Phiri and Mr Sinkala in terms of their attitude towards risk?
- Mr Phiri has K10,000 in his account. He is considering investing in a project which has 70 % probability of earning a profit of K10,000 and a 30% probability of incurring a loss of K10,000. His utility at the moment is 20 utiles with the current K10,000. With K20, 000 his utility would be 25 utiles and with K0 his utility would be zero.a) What is the expected profit of the project? b) What is the expected marginal utility of the project? Is Mr Phiri likely to invest in the project? Mr Sinkala also has K10,000 from which he derives 20 utiles. However, Mr Phiri derives 15 utiles from the profit of K10,000.c) What is the expected marginal utility for Mr Sinkala? d) How can you describe Mr Phiri and Mr Sinkala in terms of their attitude towards risk?You have $1,000 that you can invest. If you buy Ford stock, you face the following returns and probabilities from holding the stock for one year: with a probability of 0.2 you will get $1,500; with a probability of 0.4 you will get $1,100; and with a probability of 0.4 you will get $900. If you put the money into the bank, in one year’s time you will get $1,100 for certain. a) What is the expected value of your earnings from investing in Ford stock? b) Suppose you are risk-averse. Can we say for sure whether you will invest in Ford stock or put your money into the bank?A risk-averse investor will: Answer a. Always accept a greater risk with a greater expected return b. Only invest in assets providing certain returns c. Sometimes accept a lower expected return if it means less ri d. Never accept lower risk if it means accepting a lower expected return
- The risk free rate is 3%. The optimal risky portfolio has an expected return of 9% and standard deviation of 20%. Answer the following questions. Assume the utility function of an investor is U = E(r) − 0.5Aσ2. What is condition of A to make the investors prefer the optimal risky portfolio than the risk free asset?Uncertainty The Utility function is U = W1/3Flood occurs with Probabilities=1/25. The Value of a house is $450,000 if no flood. Aftera flood, the value is $50,000. Cost of insurance is 10 cents per dollar.a. Calculate EU b. Calculate EV c. Calculate CE d. Calculate RP e. Calculate the variance and standard deviation f. How much insurance should you buy? Assume your are paying premium in all events.g. What is the expected profit of the insurance company? h. Calculate the coefficient of absolute and relative risk aversion“Risk-averse investor will never assume risk” - would you agree? Justify your stand. Also, explain the components of return of investment.
- A person has an expected utility function of the form u(w) = w0.5 . He initially has wealth of $4. He has a lottery ticket that will be worth $12 with probability 1/2 and will be worth $0 with probability 1/2. What is his expected utility? What is the lowest price p at which he would part with the ticket?Suppose XYZ Corporation's stock price rises or falls with equal probability by $25 each month, starting where it ended the previous month. What is the value of a three month at the-money European call option on XYZ's stock if the stock is priced at $100 when the option is purchased?$______In the table below x denotes the X-Tract Company’s projected annual profit (in $1,000). The table also shows the probability of earning that profit. The negative value indicates a loss. x f(x) x = profit -100 0.01 f(x) = probability -200 0.04 0 100 0.26 200 0.54 300 0.05 400 0.02 8 What is the expected value of profit? a $136 b $142 c $148 d $154