Suppose that two investments have the same three payoffs, but the probability associated with each payoff differs, as illustrated in the table below:
|
PAYOFF
|
PROBABILITY
(INVESTMENT A)
|
PROBABILITY
(INVESTMENTB)
|
|
$300
|
0.10
|
0.30
|
|
$250
|
0.80
|
0.40
|
|
$200
|
0.10
|
0.30
|
a. Find the expected return and standard deviation of each investment.
b. Jill has the utility function U = 5I, where I denotes the payoff. Which investment will she choose?
c. Ken has the utility function U = 51I. Which investment will he choose?
d. Laura has the utility function U = 5I2. Which invest- ment will she choose?