Question
In: Finance
Suppose an investor, Erik, is offered the investment opportunities described in the table below. Each investment...
Suppose an investor, Erik, is offered the investment opportunities described in the table below. Each investment costs $1,000 today and provides a payoff, also described below, one year from now.
|
Option |
Payoff One Year from Now |
|---|---|
| 1 | 100% chance of receiving $1,100 |
| 2 | 50% chance of receiving $1,000 |
| 50% chance of receiving $1,200 | |
| 3 | 50% chance of receiving $200 |
| 50% chance of receiving $2,000 |
If Erik is risk averse, which investment will he prefer?
The investor will choose option 1.
The investor will choose option 2.
The investor will choose option 3.
The investor will be indifferent toward these options.
In contrast to his brother Erik, Devin is a risk lover (or exhibits risk seeking behavior). Which of the following statements is true about Devin?
Everything else remaining constant, Devin will prefer option 3.
Everything else remaining constant, Devin will prefer option 2.
Everything else remaining constant, Devin will prefer option 1.
None of these options is preferred.
Solutions
jeff jeffy answered 1 week agoRelated Solutions
Investor attitudes toward risk Erik is an investor with $5,000 available for investment. He has the...
Investor attitudes toward risk
Erik is an investor with $5,000 available for investment. He has
the following three investment possibilities from which to
choose:
Option
Scenarios
1
Keep the $5,000 in cash for one year.
2
Invest in a friend’s business with a 50% chance of getting
$10,000 after one year and a 50% chance of getting nothing.
3
Invest in a relative’s business with a 30% chance of getting
$15,000 after one year, 20% chance of getting $2,500 after...
CRA Company is considering three investment opportunities with cash flows as described below: Project C: Cash...
CRA Company is considering three investment opportunities with
cash flows as described below:
Project C:
Cash investment now………………………………… $ 16,000
Annual Cash inflow for 5 years……………………… $ 10,000
Cash outflow at the end of 3 years…………………..$ 3,000
Additional cash inflow at the end of 5 years………..
$12,000
Project R:
Cash investment now…………………………………. $ 7,000
Cash inflow at the end of 2 years……….…………… $ 18,000
Cash inflow at the end of 7 years……………………. $ 40,000
Project A:
Cash investment now………………………………….. $...
An investor with an investment horizon of two years has two investment opportunities: 1.The first investment...
An investor with an investment horizon of two years has two
investment opportunities:
1.The first investment opportunity is to invest in two-year
Treasury bond, yielding 5% per year.
2.The second opportunity is to invest in one-year Treasury bond
and then after one year, to roll over an investment into another
one year bond. If one year Treasury bond yields 4% and assuming
that Expectation Theory holds what should one year bond yield one
year from now? Explain fully and show...
For each of the procedures described in the table below, select from the list provided the...
For each of the procedures described in the table below, select
from the list provided the audit procedure that the auditor
performed. Then, indicate if the procedure was a substantive
procedure or a test of controls.
Possible Audit Procedure:
1. Analytical Procedures
2. Confirmation
3. Inquiry
4. Inspection
5. Observation
6. Recalculation
7. Reperformance
Description of Procedure
Audit Procedure Performed
(1-7 from list above)
Classification of Audit Procedure
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The preparations of two aqueous solutions are described in the table below. For each solution, write...
The preparations of two aqueous solutions are described in the
table below. For each solution, write the chemical formulas of the
major species present at
equilibrium. You can leave out water itself.
Write the chemical formulas of the species that will act as
acids in the 'acids' row, the formulas of the species that will act
as bases in the 'bases' row, and the formulas of the species that
will act as neither acids nor bases in the 'other' row....
Suppose that you are offered an investment at cost of 800. That investment will pay the...
Suppose that you are offered an investment at cost of 800. That
investment will pay the following cash flows.
0. 1. 2. 3. 4. 5
0. 500. 400. 300. 200. 100
A) should you make the investment if the required rate of return
is 12% per year? why? explain.
B) What is the internal rate of return of this cash flow stream?
if you require a rate of return of 12% annually. Should you make
the investment? Why? explain.
Annual cash inflows from two competing investment opportunities are given below. Each investment opportunity will require...
Annual cash inflows from two competing investment opportunities
are given below. Each investment opportunity will require the same
initial investment. Compute the present value of the cash inflows
for each investment using a 20% discount rate.
Year
Investment X
Investment Y
1
$500
2,000
2
1,000
1,500
3
1,500
1,000
4
2,000
5,00
Total
$5,000
$5,000
At the end of three years, when you graduate from college, your
father has promised to give you a used car that will cost...
Sparr Investments, Inc., specializes in tax-deferred investment opportunities for its clients. Recently Sparr offered a payroll...
Sparr Investments, Inc., specializes in tax-deferred investment
opportunities for its clients. Recently Sparr offered a payroll
deduction investment program for the employees of a particular
company. Sparr estimates that the employees are currently averaging
$100 or less per month in tax-deferred investments. A sample of 35
employees will be used to test Sparr's hypothesis about the current
level of investment activity among the population of employees.
Assume the employee monthly tax-deferred investment amounts have a
population standard deviation of $75...
Bill Zimmerman is evaluating two new business opportunities. Each of the opportunities shown below has a...
Bill Zimmerman is evaluating two new business opportunities.
Each of the opportunities shown below has a ten-year life. Bill
uses a 12% discount rate.
Option 1
Option 2
Equipment purchase and installation
$70,200
$82,120
Annual cash flow
$28,600
$31,070
Equipment overhaul in year 3
$4,810
-
Equipment overhaul in year 5
-
$6,250
Calculate the net present value of the two opportunities.
(Round present value factor calculations to 4 decimal
places, e.g. 1.2514 and the final answers to 0 decimal...
Bill Zimmerman is evaluating two new business opportunities. Each of the opportunities shown below has a...
Bill Zimmerman is evaluating two new business opportunities.
Each of the opportunities shown below has a ten-year life. Bill
uses a 12% discount rate.
Option 1
Option 2
Equipment purchase and installation
$70,200
$82,120
Annual cash flow
$28,600
$31,070
Equipment overhaul in year 3
$4,810
-
Equipment overhaul in year 5
-
$6,250
Click here to view the factor table.
Calculate the net present value of the two opportunities.
(Round present value factor calculations to 4 decimal
places, e.g. 1.2514...
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