You are considering three investment options (and, of course, you could choose not to invest). You...

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You are considering three investment options (and, of course, you could choose not to invest). You have $50,000 to invest and for your consequence you will consider the cash (in thousands of dollars) that remains one year after you make your investment. The investment amounts for each of the options and the potential returns are as follows: Investment Investment Value of Investment after Probability Option Outcome one year Excellent |S53,000 |S52,000 $45,500 |$56,000 |$50,000 |$44,500 $60,000 |$55,000 $35,000 18% 60% Large Cap Stock Average Poor Excellent 33% Mid Cap Stock Average 45% Рoor Excellent Average Poor 40% 25% Small Cap Stock Assume that if you do not invest your money, you do not earn interest. a) Draw a decision tree for this scenario, making your consequence your cash in hand at the end of one year in thousands of dollars. b) Solve this decision tree using EMV. What is the optimal decision strategy? c) If we assume that an investor's utility function is given by U(x) = Vx where x is in thousands of dollars, what is the optimal decision and what is its expected utility (round your utilities to 3 decimal places when calculating the utilities)? Based on the utility function, is the investor risk averse, risk seeking, or risk neutral? Does the optimal investment choice make sense given that risk attitude? d) If we assume that an investor's utility function is given by U(x) = x², again with x in thousandsof dollars, what is the optimal decision and what is its expected utility? Based on the utility function, is the investor risk averse, risk seeking, or risk neutral? Does the optimal investment choice make sense given that risk attitude? You are considering three investment options (and, of course, you could choose not to invest). You have $50,000 to invest and for your consequence you will consider the cash (in thousands of dollars) that remains one year after you make your investment. The investment amounts for each of the options and the potential returns are as follows: Investment Investment Value of Investment after Probability Option Outcome one year Excellent |S53,000 |S52,000 $45,500 |$56,000 |$50,000 |$44,500 $60,000 |$55,000 $35,000 18% 60% Large Cap Stock Average Poor Excellent 33% Mid Cap Stock Average 45% Рoor Excellent Average Poor 40% 25% Small Cap Stock Assume that if you do not invest your money, you do not earn interest. a) Draw a decision tree for this scenario, making your consequence your cash in hand at the end of one year in thousands of dollars. b) Solve this decision tree using EMV. What is the optimal decision strategy? c) If we assume that an investor's utility function is given by U(x) = Vx where x is in thousands of dollars, what is the optimal decision and what is its expected utility (round your utilities to 3 decimal places when calculating the utilities)? Based on the utility function, is the investor risk averse, risk seeking, or risk neutral? Does the optimal investment choice make sense given that risk attitude? d) If we assume that an investor's utility function is given by U(x) = x², again with x in thousandsof dollars, what is the optimal decision and what is its expected utility? Based on the utility function, is the investor risk averse, risk seeking, or risk neutral? Does the optimal investment choice make sense given that risk attitude?

Answer rating: 100% (QA)

a Here is the decision tree bash Copy code Excellent Average Poor 018 06 04 Initial State Invest 50000 Invest 50000 Do not invest 53000 033 52000 045 45500 022 Excellent Average Poor 067 055 045 56000 ... View the full answer