itky lvest in the company 4 You have 1000 that you can inves

itky lvest in the company? 4. You have $1000 that you can invest. If you buy Rogers stock, you face the following returns and probabilities from holding the stock for one year: with a probability of 0.2 you will get $1500; with a probability of 0.4 you will get $1100; and with a probability of 0.4 you will get $900. If you put the money into the bank, in one year\'s time you will get $1100 for certain. a. What is the expected value of your earnings from investing in Rogers stock? b. Suppose you are risk-averse. Can we say for sure whether you will invest in Rogers stock or put your money into the bank?

Solution

Ans 4)a)

Expected Value from INvesting in Rogers stock

=0.2(1500)+0.4(1100)+0.4(900)=300+400+360=$1060 after a year but if money kept in Bank then we will get $1100 with certainity

Ans 4)b)

If you are risk averse then you will choose to earn $1100 from bank deposits because Risk averse agent will never choose option with uncertainity factor unless hedging og the precieved rik is provided. if you were Risk Neutral then you would be indifferent between both these options and lastly if Risk lover profile hould choose Rogers stock over ban account.