Which of the two investments is more risky? Which investment should the individual choose?
Spreadsheet Problem 2: An individual is considering two investment projects. Project A will return a zero profit if conditions are poor, a profit of $ 4 if conditions are good, and a profit of $ 8 if conditions are excellent. Project B will return a profit of $ 2 if conditions are poor, a profit of $ 3 if conditions are good, and a profit of $ 4 if conditions are excellent. The probably distribution of the conditions is as follows
Conditions: Poor Good Excellent Probability 40 % 50 % 10 %
Using Excel, calculate the expected value of each project and identify the preferred project according to this criterion.
Assume that the individual’ s utility function for profit is U( X) = X- 0.05X2. Calculate the expected utility of each project and identify the preferred project according to this criterion.
Is this individual risk adverse, risk neutral, or risk seeking? Why? Froeb et al.’ s Chapter 17: a) Individual problems: 17 – 1 and 17 – 4.