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# An individual is considering two investment projects. Project A will return a zero prof t if conditions are poor, a profit of \$4 if conditions are...

An individual is considering two investment projects. Project A will return a zero prof t if conditions are poor, a profit of \$4 if conditions are good, and a profit of \$8 if conditions are excellent. Project B will return a prof t of \$2 if conditions are poor, a prof t of \$3 if conditions are good, and a prof t of \$4 if conditions are excellent. The probability distribution of conditions is as follows:

(a) Using Excel, calculate the expected value of each project and identify the preferred project according to this criterion. (b) Assume that the individual’s utility function for prof t is U(X) = X – 0.05X 2. Calculate the expected utility of each project and identify the preferred project according to this criterion. (c) Is this individual risk averse, risk neutral, or risk seeking? Why?

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A
profit prob
0
4
8 A
B expected profit
2.8
2.7 prob*profit
0.4
0.5
0.1 utility
0
2
0.8
2.8 utility*prob
0
3.2
4.8 0
1.6
0.48
2.08 expected utility
2.08
2.315 we must prefer A as exp profit and...

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