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An investment of $10,000 in a high risk venture has a 50-50 chance over the next year of increasing to $14,000 or decreasing to $8000. Thus the net return can be either $4000 or -$2,000. Two investors A and B have exhibited the following indifference probabilities:

                                    Indifference Probabilities

Net return ($)             Investor A         Investor B

-2000                                0.00                 0.00

-1000                                 .70                    .10

       0                                 .80                    .20

1000                                 .85                    .30

2000                                 .90                    .50

3000                                 .95                    .60

4000                                1.00                  1.00

Graph the utility functions for investors A and B and categorize each investor as either risk-averse person or a risk seeker.

Financial Management, Finance

  • Category:- Financial Management
  • Reference No.:- M92087161

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