You are faced with the chance of an investment opportunity which yields $500,000 with probability 0.3, $100,000 with probability 0.2 and $50,000 with probability 0.5?

Questions: 

a) If you are only the tiniest bit risk averse, what is the most you would be willing to pay for this opportunity? (Explain.)

 

b) If you are extremely risk averse what is the minimum amount you would be willing to pay? (Explain.)

 

c) Suppose you are extremely risk averse?

d)What is the expected profit to a risk neutral firm from buying the investment opportunity from you?

And if there are lots of risk neutral firms competing to buy the opportunity off you, how valuable is the investment opportunity to you then?

Answer rating: 100% (QA)

a The most an investor would be willing to pay for this investment opportunity if they are only the ... View the full answer