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Doss [256]
2 years ago
14

. Alex has the option to invest in an asset. Her financial advisor has told her there is expected value (utility) of $20,000 on

the asset. With some probability p, the asset pays off well ($45,000). However, there is some chance that it will flop (1-p), and pay poorly ($2000). Assume linear utility. a. What are the probabilities that the asset will pay well and poorly? Show your calculations. We can solve this by using the expected utility/value equation: b. If she has $21000 to invest, should she invest in the asset? Why or why not?
Business
1 answer:
LiRa [457]2 years ago
8 0

Answer:

A) the probability that the asset will pay well is 51.16% and the probability that it pays poorly is 48.84%.

B) She should not invest in the asset because the expected value = the price asset, there is no expected profit.

Explanation:

There are 2 probable returns:

  1. Asset will pay well = P = $45,000
  2. Asset will pay poorly = 1 - P = $2,000

since the principal = $20,000, and the expected value = $20,000, the expected value equation would be:

45,000p + 2,000(1 - p) = 20,000

45,000 + 2,000 - 2,000p = 20,000

43,000p = 22,000

p = 0.5116 or 51.16%

1 - p = 48.84%

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Question Completion:

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Pretzels            10                8

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Specialization Output:

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Chips                20                0

Pretzels              0                16

Total output     20                16

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