An agent comes to a Player with a business proposition. For a $30,000 investment

Question

An agent comes to a Player with a business proposition. For a $30,000 investment, the agent can return $60,000 by the end of the year. If the Player can invest $50,000, the agent can return $115,000. In both cases, the Player wants his money plus 50%. Assuming the Agent has the option of actually doing the work or running with the investment money, should the Player A) pass on the opportunity, B) invest $30,000, or C) invest $50,000?

If the Agent were to require collateral, how much would he need to justify any investment not already agreed upon?

Explanation / Answer

Ans. Player wants his money plus 50%, and if player is risk averse, then in that case he should pass on the opportunity since there is 50:50 chances of agent doing the work and running with money so expected value in that case will be:

For 30,000 investment,

60000 x50% + 0 x 50% = 30000 expected value

For 50,000 investment,

115000 x 50% + 0 x 50% = 57,500 expected value

In both cases expected value is less than requirement of 150% of investment.

For second case he require collateral value of minimum value of his investment + 50%

i.e for $30000 investment, $45000 collateral is required and for $50000 investment he require $75000 collateral.

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