Question

Katy Chan has inherited $100 000 from her aunt. She wants to invest the money for one year after which she will go on a trip to Egypt with the return on investment (i.e., she wants to save the $100 000 and spend the return). She wants to maximize the return on her one-year investment. Katy is considering the following options:

1. Buy bonds at a guaranteed interest rate of 12%.
2. Invest in a new computer company. If the company is successful she will get a 20% return on her investment whereas if it fails she would lose 5% on her investment. The probability that the computer company will be successful is estimated at 80%.
3. Invest half the money in bonds and half in the computer company. Profit or loss will be in proportion to the amount of money invested.

Suppose that Katy has the following utilities:

	u(20 000) = 1
	u(13 500) = 0.9
	u(12 000) = 0.8
	u(3 500) = 0.6
	u(−5 000) = 0

1. Using monetary values determine Katy's optimal decision.
2. Using utilities, determine Katy's optimal decision.
3. With regard to a gamble with payoffs of -$5 000 and $12 000, Katy is indifferent between accepting $3 500 for certain and the gamble. What probability has Katy assigned to the event that the payoff will be $12 000?

Answer 1

her Los oop-350012000: ?