Q. Assume you have invested in a new computer company whose profitability depends on 2 factors:

(1) Whether the U.S. Congress press a tariff raising the cost of Japanese computer (the tariff will increase profits)

(2) Whether the U.S. economy grows slowly or quickly (faster growth will increase profits).

a) Illustrate what are four mutually exclusive states of the world that you should be concerned about?

b) Past history suggests that the U.S. Congress will impose a tariff only if economy grows slowly. If this is true, is the investment more attractive to (a) a risk adverse person, (b) a risk loving person;

(c) a risk neutral person? Explain briefly this basis for your conclusions.