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Practice Question_Chap 5

# Practice Question_Chap 5 - Practice Question(With Solution...

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Practice Question (With Solution) Chapter 5 Uncertainty and Consumer Behavior 7.   Suppose   that   two   investments   have   the   same   three   payoffs,   but   the  probability associated with each payoff differs, as illustrated in the table  below: Payoff    Probabilities for Investment A Probabilities for Investment B   \$300 0.10 0.30 \$250 0.80 0.40 \$200 0.10 0.30 a. Find the expected return and standard deviation of each investment. The expected value of the return on investment A is EV  = (0.1)(300) + (0.8)(250) + (0.1)(200) = \$250. The variance on investment A is σ 2  = (0.1)(300 - 250) 2  + (0.8)(250 - 250) 2  + (0.1)(200 - 250) 2  = \$500. The expected value of the return on  investment B is EV  = (0.3)(300) + (0.4)(250) + (0.3)(200) = \$250. The variance on investment B is σ 2  = (0.3)(300 - 250) 2  + (0.4)(250 - 250) 2  + (0.3)(200 - 250) 2  = \$1,500. b. Jill  has   the  utility   function   U = 5 I ,   where  I  denotes   the  payoff.     Which  investment will she choose?

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