Consider an investor with utility given U = ln (π)
This investor is facing a one-year investment opportunity that will have a cashflow next year of either 80 or 140. These will happen with probability 0.25 and 0.75, respectively. Be sure to show your calculations when working out your answers to the questions below:
(a) What is the expected value of the investment?
(b) What is the maximum the investor will pay to take part in this investment?
(c) What is his expected return (if he pays the price in question b)?
(d) What if the cashflow will be 72.5 and 142.5. What will happen with expected return? Explain.