An Investor Has the Following Utilities Corresponding to Various Possible

question 36

Multiple Choice

An investor has the following utilities corresponding to various possible returns on an investment:
$\begin{array}{|c|l|}\hline \text { Profit } &{\text { Utility }} \\\hline \$ 100,000 & 1 \\\hline \$ 75,000 & 0.9 \\\hline \$ 40,000 & 0.6 \\\hline \$ 0 & 0.25 \\\hline-\$ 5,000 & 0.10 \\\hline-\$ 10,000 & 0 \\\hline\end{array}$
-The investor is considering two potential investments with the following potential returns and the probability of these returns. $\begin{array}{|l|l|r|l|}\hline \text { Investment } 1&&\text { Investment } 2\\\hline \text { Profit } & \text { Probability } &{\text { Profit }} & \text { Probability } \\\hline \$ 75,000 & 0.1 & \$ 100,000 & 0.2 \\\hline \$ 40,000 & 0.4 & \$ 75,000 & 0.3 \\\hline \$ \quad 0 & 0.5 & -\$ \quad 5000 & 0.5 \\\hline\end{array}$
Which investment should the investor choose and why?

• A)Investment 2 because it has the highest expected monetary value of $40,000.
• B)Investment 1 because it has the lowest expected monetary value of $23,500.
• C)Investment 2 because it has the highest expected utility of 0.52.
• D)Investment 1 because it has the lowest expected utility of 0.455.
• E)Cannot be determined without more information.

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