Ben and Meera are considering between three investment opportunities shown in the table below. The first...

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Ben and Meera are considering between three investment opportunities shown in the table below. The first two opportunities have two possible payoffs depending on the state of the market. The third opportunity always returns the same payoff. Meera's utility function for wealth is given by U(W) = √W. Ben's utility function for wealth is given by U(W) = W². Investment 1 Investment 2 Investment 3 Outcome A Probability 0.6 0.5 1 Payoff 25 64 50 Outcome B Probability 0.4 0.5 Payoff 100 36 a. Using the table above, calculate for each investment the expected value, variance, and standard deviation. (20%) b. Explain why the variance of an investment is a useful measure of the risk associated with it. (20%) c. Which of the three investment choices would be Meera's most and least preferred? Use calculations and/or diagrams to help with the explanation where necessary. (30%) d. Would Ben's choices for his most and least preferred investments differ to those of Meera's? Explain your reasoning and discuss their attitudes towards risk. (30%) Ben and Meera are considering between three investment opportunities shown in the table below. The first two opportunities have two possible payoffs depending on the state of the market. The third opportunity always returns the same payoff. Meera's utility function for wealth is given by U(W) = √W. Ben's utility function for wealth is given by U(W) = W². Investment 1 Investment 2 Investment 3 Outcome A Probability 0.6 0.5 1 Payoff 25 64 50 Outcome B Probability 0.4 0.5 Payoff 100 36 a. Using the table above, calculate for each investment the expected value, variance, and standard deviation. (20%) b. Explain why the variance of an investment is a useful measure of the risk associated with it. (20%) c. Which of the three investment choices would be Meera's most and least preferred? Use calculations and/or diagrams to help with the explanation where necessary. (30%) d. Would Ben's choices for his most and least preferred investments differ to those of Meera's? Explain your reasoning and discuss their attitudes towards risk. (30%)

Answer rating: 100% (QA)

a Using the table we can calculate the expected value variance and standard deviation of each invest... View the full answer