TrenStar Inc. is planning to offer several investments to investors and is in the process of designing its marketing materials. Each investment’s value in the future will be related to the return on the S&P/TSX Composite Index over the year. The cost and value of the investments are outlined as follows:

Assume that the probability of the S&P/TSX falling (i.e., having a return less than 0 percent) is 40 percent and that the risk-free rate is zero. Risk-averse investors are only willing to invest in a risky undertaking if the expected value is sufficiently greater than the cost. Which investments will be preferred by a risk-averse investor? Explain yourreasoning.

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Value of investment if: Investment Cost today $7 $12 $9 $0 $0 | S&P/TSX return < 0% | S&P/TSX return 0% $15 $20 -$10 $10 $15 $15 $0 $10 -$10