Question #2.

(30 marks)

Consider a risky project x that has the following payoff and probability distribution table:

Payoff	$1	$4	$16
Probability	0.5	0.2	0.3

a.

Compute the expected value, EV, of project x. (3 marks)

b.

Suppose an investor, Mrs. Donna Nash, has a utility function given by the function

+20

Compute CE, the certainty equivalence, of x for our investor. (8marks)

Is Mrs. Nash risk-neutral, risk-averse, or risk-loving? Explain (2marks)

c.

Suppose another investor, Mr. John Nash, has a utility function given by the function

Compute CE, the certainty equivalence, of x for our investor. (7marks)

Is Mr. Nash risk-neutral, risk-averse, or risk-loving? Explain (2marks)

d.

Suppose their son, Joe Nash, has a utility function given by the function

Compute CE, the certainty equivalence, of x for our investor. (6marks)

Is Joe Nash risk-neutral, risk-averse, or risk-loving? Explain (2marks)