Certainty equivalent of the real estate investment

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Reference no: EM132069657

A young couple has $28,000 (90% of their savings) to invest in either savings bonds or a real estate deal. The (zero coupon) savings bonds return $35,000 ($7,000 interest) in three years. The (completely liquid) real estate investment, after three years, is worth $66,000 if economic conditions are good (70% chance), and worth nothing ($0) if economic conditions are bad (30%). The couple decides to invest in the savings bonds.

a. What do you know about the certainty equivalent (for the couple) of the real estate investment? HINT – Make sure you understand the concept of certainty equivalence.

b. What would you do in these circumstances?

c. Give me an example of a different set of probabilities that would change your decision in b”.

Using certinty equivilant on Excel.

Reference no: EM132069657

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