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Extra - He may purchase as many units as he wishes up to...

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1. 2. Extra Tutorial Questions Week 3 3. EQ4. Gavin’s friend is planning to invest $1million in a rock concert to be held 1 year from now. The friend figures he will obtain $3million revenue from his $1million investment – unless it rains. If it rains, he will lose his entire investment. There is a 50% chance that it will rain the day of the concert. Gavin suggests that he buy rain insurance. He can buy one unit rain insurance for $.50, and this unit pays $1 if it rains and nothing if it does not.
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Unformatted text preview: He may purchase as many units as he wishes, up to $3million. a. What is the expected rate of return on his investment if he buys u units of rain insurance? (the cost of the insurance is in addition to his $1million investment) b. What number of units will minimise the variance of his return? What is this minimum value? And what is the corresponding expected rate of return? [ Hint : before calculating a general expression for variance, think about a simple answer]...
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