Assume you arc presented with a one-year investment opportunity promising an eve
ID: 2728881 • Letter: A
Question
Assume you arc presented with a one-year investment opportunity promising an even 50% probability of either a NOK 100,000 pay-off (piL) or a NOK 200,000 pay-off (piH) by the end of the year. Being a function of the potential pay-offs, assume that your utility function is spccificd as U [pi] = pi^1/2. (b) Compute your utility from the investment's expected pay-off, U[E(pi)], compare to the expected utility of the investment's pay-off, E(U(pi)], and describe how the analysis relate to your attitude towards risk! (c) In order to participate in the investment, how much are you willing to pay today? Is your risk-premium positive or negative? Briefly explain!Explanation / Answer
Thus, expectedpay off is $ 150,000
Probabilty Payoff Expected Payoff Lower 50% 100000 50000 Higher 50% 200000 100000 Total 150000