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Determine the expected value and variance

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Reference no: EM133132851

A Managerial problem - Decision Under Uncertainty 

An investor is considering five possible investment strategies. The investor cares only about the expected payoff and possibly the variance of each strategy. The following table shows the payoffs under bad luck and good luck and the associated probabilities.

Strategy

Bad Luck Payoff

Probability of Bad Luck

Good Luck Payoff

Probability of Good Luck

A

4

0.6

9

0.4

B

5

0.3

5

0.7

C

2

0.5

12

0.5

D

4

0.8

11

0.2

E

3

0.7

10

0.3
  1. Using a spreadsheet, determine the expected value and variance for each strategy. 
  2. Which strategy would be chosen by a risk-neutral investor? A risk-preferring investor? 
  3. If we know only that the investor is risk-averse, can we rule out any strategies? 

Reference no: EM133132851

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