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Investment Plan Assignment

Author:
February 18th, 2020

An investor has $5000 total assets. Now, he has a chance to invest $1000 from his assets. He can either (A) invest $1000 to a medical device manufacturer or (B) put $1000 into a saving account. By investing this company, the investor knows that he can either earn a profit of $150 with probability (p) or take a loss of $50 with probability (1-p) after one year. By putting the money into a saving account, he earns net profit $100 after one year. The investor figures out that he cannot make a decision because he is in different between the two investment options. Assume that the utility function for the investor is u(x)=In(x), where x is the total assets (including profit and loss).

• What is the certainty equivalent for the investment plan?

• What will the investor do if he has $7500 assets instead? (Hint: what property does u(x)=In(x) have? (Enter A or B or indifferent) Get Finance homework help today

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