Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Basic Finance Expert

Suppose you have just inherited $10,000 and are considering the following options for investing the money to maximize your return.

1. Put the money in an interest-bearing checking account, which earns 2%. The FDIC insures the account against bank failure.

2. Invest the money in a corporate bond, which a states return of 5%, but there is a 10% chance the company could go bankrupt.

3. Loan the money to one of your friends, roommates, Mike, at an agreed-upon interest rate of 8%, but you believe that there is a 7% chance that Mike will leave town without repaying your.

4. Hold the money in cash and earn zero return.

a) If you are risk-neutral which of the four options should you choose to maximize your expected return?

b) Suppose 3 is your only option. If you could pay your friend $100 to find out extra info about Mike that would indicate with certainty if he will leave town without paying or not, would you pay the $100? What does this say about the value of better information regarding risk?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M939681

Have any Question? 


Related Questions in Basic Finance

You wish to establish a scholarship fund for students at

You wish to establish a scholarship fund for students at Clever College. The fund wouldpay an annual scholarship that would start at $5,000 awarded one year from now andincrease by 3.5% per year forever. If the fund coul ...

List the potential costs associated with financial distress

List the potential costs associated with financial distress ? List the potential direct and indirect costs associated with bankruptcy ? Regarding financial slack: a. What is it? b. How is slack created? c. Why do compani ...

1 how do reward systems serve as barriers to enterprise

1. How do reward systems serve as barriers to enterprise integration? 2. In your words, describe and illustrate the great divide. Do you believe the great divide phenomenon is as widely experienced as the text indicates? ...

Phillips rock and mud is trying to determine the maximum

Phillips Rock and Mud is trying to determine the maximum amount of cash dividends it can pay this year. Assume its balance sheet is as follows: Assets Cash $ 386,000 Accounts receivable 836,000 Fixed assets   1,048,000   ...

1 what is a multiple baseline design and when are such

1. What is a multiple baseline design, and when are such designs typically used? 2. How do researchers analyze the data from single-case experiments? 3. In what areas have single-case experiments been primarily used?

An electronic retail chain wishes to minimize its ordering

An electronic retail chain wishes to minimize its ordering costs for a particularly popular model of laptop computer. This retail has a line credit to finance its inventory and the current holding rate is 5.5%. The chain ...

Examine the following pairs of calls which differ only by

Examine the following pairs of calls, which differ only by exercise price. Determine whether any violate the rules regarding relationships between American options that differ only by exercise price a. August 155 and 160 ...

A company forecasts free cash flow next year to be 4

A company forecasts free cash flow next year to be $4 million, $8 million in two years, and $12 million in 3 years. Thereafter, free cash flow is projected to grow at a constant rate of 3% per year forever. If the overal ...

Define prying action sketch an alternative joint diagram

Define prying action ? Sketch an alternative joint diagram showing the effects of prying action Name at least two things the joint designer can do to reduce prying action ? This and the following three questions are all ...

The following excerpts are taken from dividend policy

The following excerpts are taken from "Dividend Policy Determinants: An Investigation of the Influences of Stakeholder Theory" by Mark E. Holder, Frederick W. Langrehr, and J. Lawrence Hexter, published in the Autumn 199 ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro

Describe what you learned about the impact of economic

Describe what you learned about the impact of economic, social, and demographic trends affecting the US labor environmen