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Please answer with clear steps. An investment of $10,000 in a high-risk venture has a 50-50 chance over the next year of increasing to $14,000 or decreasing to $8,000. That means that the net return c
Please answer with clear steps.
An investment of $10,000 in a high-risk venture has a 50-50 chance over the next year of increasing to $14,000 or decreasing to $8,000. That means that the net return can be either $4,000 or $-2,000. Suppose that a prospective investor exhibits the following indifference behavior: Refer to attached file.
a. Sketch the graph of the utility function for the investor. What is his risk propensity? Briefly explain.
b. Suppose the investor has the chance to invest in one of the two ventures, I or II. Venture I can produce a net return of $3000 with probability 0.4 or a net loss of $1000 with probability 0.6. Venture II can produce a net return of $2000 with probability 0.6 or no return with probability 0.4. Based on the utility function developed in part (a), which venture should the investor select?
