Suppose a company has two investment opportunities, A and B, with the following probabilities and payoffs: Investment
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Question:
Suppose a company has two investment opportunities, A and B, with the following probabilities and payoffs:
- Investment A has a 30% chance of a $10,000 return and a 70% chance of a $2,000 return.
- Investment B has a 50% chance of a $6,000 return and a 50% chance of a $4,000 return.
Assume that the company has a risk aversion coefficient of 3 and a risk-free interest rate of 5%.
a) Calculate the expected values and standard deviations of each investment. b) Determine the certainty equivalents of each investment. c) Calculate the risk premiums for each investment. d) Based on your calculations, which investment should the company choose?
Related Book For
Basic Finance An Introduction to Financial Institutions Investments and Management
ISBN: 978-1111820633
10th edition
Authors: Herbert B. Mayo
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