(A) Construct a Decision Tree to Help the Investor Make

question 71

Essay

(A) Construct a decision tree to help the investor make his decision. Make sure to label all decision and chance nodes and include appropriate costs, payoffs and probabilities.
(B) What is the best choice for the investor? Why?
(C) Suppose that investor has an exponential utility function for final assets with a risk tolerance parameter equal to $60,000. Which investment opportunity will he prefer in this case? What is his certainty equivalent?

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Definitions:

Need Achievement Theory

A psychological theory that explores motivation and focuses on how an individual's need for achievement influences their behavior and performance.

TAT

Thematic Apperception Test, a projective psychological test that involves creating stories about ambiguous scenes and images, used to uncover a person's underlying thoughts, motives, and feelings.

Achievement Motivation

A drive within individuals to set and accomplish goals, often fueled by a desire for success and recognition.

Achievement Situations

Contexts or scenarios in which an individual's performance is measured and evaluated against a standard or against others.