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A risk-neutral investor has $10,000 to invest and is deciding between three options: two investment opportunities, or just hanging onto the money...
A risk-neutral investor has $10,000 to invest and is deciding between three options: two investment opportunities, or just hanging onto the money (i.e., ending up with $10,000). Opportunity A has a 50% chance of success, resulting in the investor's value rising to $30,000, and a 50% chance of failure, with value falling to $0. Opportunity B has a 10% chance of success, resulting in the investor's value rising to $80,000, and a 90% chance of failure, with value falling to $0.
Draw the decision tree.
Which investment should the investor choose? Explain.
