Alison is a risk-averse investor. He has $10,000 and he will invest in Share A or...

 

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Alison is a risk-averse investor. He has $10,000 and he will invest in Share A or Share B. Payoffs and probabilities are shown below: Share A High future profitability Low future profitability (0.70) Share B Probabilities 30% 70% High future profitability (0.60) $1,225 Low future profitability (0.40) 625 Alison is a rational decision-maker and has a square root utility for money Required: Future Profitability a) Based on the above information which is the riskier investment? Do not calculate at this point. 2 High Low 60% 40% b) Calculate Alison expected utility for each action and indicate which action he would choose if he acted based on his prior information. 3 c) You are given the following information for firm A. Payoff $4,100 400 Financial Statements Good News 0.65 0.25 Bad News 0.35 0.75 How will informativeness of the system change if firm A is required to switch from historical cost accounting to market value accounting for its capital assets? Answer from the point of view of relevance and reliability diagonals. 3 Alison is a risk-averse investor. He has $10,000 and he will invest in Share A or Share B. Payoffs and probabilities are shown below: Share A High future profitability Low future profitability (0.70) Share B Probabilities 30% 70% High future profitability (0.60) $1,225 Low future profitability (0.40) 625 Alison is a rational decision-maker and has a square root utility for money Required: Future Profitability a) Based on the above information which is the riskier investment? Do not calculate at this point. 2 High Low 60% 40% b) Calculate Alison expected utility for each action and indicate which action he would choose if he acted based on his prior information. 3 c) You are given the following information for firm A. Payoff $4,100 400 Financial Statements Good News 0.65 0.25 Bad News 0.35 0.75 How will informativeness of the system change if firm A is required to switch from historical cost accounting to market value accounting for its capital assets? Answer from the point of view of relevance and reliability diagonals. 3

Answer rating: 100% (QA)

Answers a Riskier Investment Without calculations we can identify Share B as the riskier investment Heres why Share B has a higher probability 60 of h... View the full answer