An investor considers investing $10,000 in the stock market. He believes that the probability is 0.30 that the economy will improve, 0.40 that it will stay the same, and 0.30 that it will deteriorate. Further, if the economy improves, he expects his investment to grow to $15,000, but it can also go down to $8,000 if the economy deteriorates. If the economy stays the same, his investment will stay at $10,000.
a. What is the expected value of his investment?
b. What should the investor do if he is risk neutral?
c. Is the decision clear-cut if he is risk averse? Explain.

  • CreatedJanuary 28, 2015
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