Identify the preferred project according to the criterion

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Reference no: EM13186755

An individual is considering two investment projects. Project A will 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 proift of $4 if conditions are excellent. The probability distribution of condition 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 and identify the preferred project according to this criterion. (c) Is this individual risk averse, risk neutral, or risk seeking? Why?

Reference no: EM13186755

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