What should you do and what is the risk-adjusted value

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Reference no: EM132236244

Your elderly uncle Boris has died from eating too much pepperoni and has left you $10,000. You may invest it either in a CD that pays 4.5% for sure or in the Fly-by-Night Mutual Fund whose returns and probabilities you have assessed as:

Probability of Up 25% Probability of Up 10% Probability of Down 10%

25% 50% 25%

1. If you are risk-neutral, what should you do and what is the EMV?

2. If you are risk-averse and have a risk tolerance of $1,500, what should you do and what is the risk-adjusted value? (Do both manually, and using Precision tree.)

3. You have a friend, Jerry S., who is a stockbroker. In his 30 years of brokering stocks, he has never been wrong! If Jerry says it will go up 25%, you can take that to the bank. Jerry is willing to assess the Fly-by-Night Fund for you and to provide the probabilities of the fund going up 25%, up 10%, and down 10%, for a fee of $500. (Yes, he’s your friend, but business is business.) a) If you are risk-neutral, what should you do and what is the EMV? b) If you are risk-averse and retain a Risk Tolerance of $1,500, what should you do and what’s the Risk-Adjusted Value? (Do just using Precision tree.)

Reference no: EM132236244

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