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Home Task 1 - Investment Scenarios Situation: You have two alternative scenarios for investing $1,000,000. Question: Which investment scenario is

Home Task 1 – Investment Scenarios
Situation:
You have two alternative scenarios for investing $1,000,000. 

Question:
Which investment scenario is better?
Home Task 2 – Risk Assessment
Situation:
  • Your business partner has proposed you to join him (her) in investing $100,000 each in a new enterprise. 
  • Assume that you have that amount of money available.
  • In case of success your return is $40,000 but in case of failure you lose $20,000.
  • Your analysis shows P40 = 0.3 of success and P-20 = 0.7 of failure. 
Questions:
  • Would you invest? 
  • What is your investment risk preference and analysis?
  1. If the expected value equals zero, does it mean that in real-world situation your outcome will be zero?
  2. Why do we need expected value, standard deviation and coefficient of variation in their decision making process under uncertainty?
  3. What else do we need to do before making decision under uncertainty after the expected value, standard deviation, and coefficient of variation already calculated?

Top Answer

Let utility = ( Wealth ) ^ 0.5 Expected utility of $100,000 = ( 100,000 ) ^ .5 = 316.22 Expected Wealth = 0.30 * 140 ,000... View the full answer

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Other Answers

Let utility = ( Wealth ) ^ 0.5 Expected utility of $100,000 = ( 100,000 ) ^ .5 = 316.22 Expected Wealth = 0.30 * 140 ,000... View the full answer

2 comments
  • This Risk assessment and not consumption.I'll expect you to calculate the risk i.e,standard deviation and possibly the risk per expected of the investment and not utility.Thanks anyway.
    • oshoikpormonday82
    • Jul 19, 2016 at 11:41pm
  • Lets attempt question 1-3 instead.Tanks
    • oshoikpormonday82
    • Jul 19, 2016 at 11:41pm

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