Calculate the expected utility of each project

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Reference no: EM13149538

An individual is considering two investment projects. Project A wil return a zero profit if conditions are poor, a profit of $4 if conditions are good, and a profit of $8 if conditions are excellent. Project B will return a profit of $2 if conditions are poor, a profit of $3 if conditions are good, and a profit of $4 if conditions are excellent. The probability distribution of conditions is as follows: Conditions: Poor Good Excellent Probability: 40% 50% 10% (a) Using Excel, calculate the expected value of each project and identify the preferred project according to this criterion. (b)Assume that the individual’s utility function for profit is U(X) = X – 0.05X2. Calculate the expected utility of each project according to this criterion. (c) Is this individual risk adverse, risk neutral, or risk seeking? Why?

Reference no: EM13149538

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