Your business partner has proposed you to join him (her) in investing $100,000 e

ID: 1206497 • Letter: Y

Question

Your business partner has proposed you to join him (her) in investing $100,000 each in a new enterprise.

Assume that you have such amount of money available

In case of success your return is $40,000 but in case of failure you lose $20,000.

Your analysis shows P40 = 0.3 of success and P-20 = 0.7 of failure.

You have your own utility function. Please build it and use it.

Would you invest?

What is your investment risk preference and analysis according to your utilioty function?

Your business partner has proposed you to join him (her) in investing $100,000 each in a new enterprise.

Assume that you have such amount of money available

In case of success your return is $40,000 but in case of failure you lose $20,000.

Your analysis shows P40 = 0.3 of success and P-20 = 0.7 of failure.

You have your own utility function. Please build it and use it.

Question:

Would you invest?

What is your investment risk preference and analysis according to your utilioty function?

Let utility = ( Wealth ) ^ 0.5

Expected utility of $100,000 = ( 100,000 ) ^ .5 = 316.22

Expected Wealth = 0.30 * 140 ,000 + 0.7 * 80,000 = 42000 + 56000 = $98,000

Expected utility from the project =.30 * (140,000) ^ 05 + .70 * (80,000) ^ 0.5 = .30 * 374.16 + .70 * 282.84 = 310.23

Thus, expected utility from gamble is less than the utility of the sure sum. So, will not invest.

According to utility function, since the individual has concave utility function, so the person is risk averse.

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