Which investment should jonny choose

Assignment Help Financial Accounting

Reference no: EM133561036

Question: Jonny plans to invest $8,000 in one of the following instruments: Bonds of X Ltd., yielding 14% (a1) US treasury Bonds, yielding 11% (a2) Based on his knowledge of current economic conditions and the outlook for the industry of X Ltd., Jonny assesses the prior probability that X Ltd. will go bankrupt as 0.1. If this happens, Jonny will lose both principal and interest and receive no money at the end of the year. If X Ltd. does not go bankrupt, Jonny plans to sell the bonds, plus interest, at the end of one year. Jonny assesses the probability that the US Savings Bonds will fail to pay off as zero. Jonny also plans to sell these, plus interest, one year later. Jonny is risk-averse and decides to choose the investment that yields the highest expected utility. Assume that Jonny's utility for an amount of $x is given by square root of X, where x is the gross payoff.

Required

1. Based on his prior probabilities, which investment should Jonny choose?

2. Rather than choosing on the basis of his prior probabilities, assume that Jonny decides to analyze the current financial statements of X Ltd. These financial statements can look "good" (G)

Reference no: EM133561036

Questions Cloud

Which are the rights of users considering art 22 of gdpr : Which are the rights of the users considering Art 22 of GDPR and this can be an exemption?

What are the important factors of sport management career : What are the important factors of sport management career preparation? What are the factors leading sport management career choice?

What is meant by a plain view seizure : What is meant by a plain view seizure, and what are the requirements for conducting such a seizure by a law enforcement officer?

What is one way gourmet delights can creatively adapt their : What is one way Gourmet Delights can creatively adapt their existing menu, in respect to these concerns, while ensuring culinary excellence and customer

Which investment should jonny choose : Assume that Jonny decides to analyze the current financial statements of X Ltd. These financial statements can look "good"

Define behavioral law : Define behavioral law and economics. Why does Judge Posner, in his book Economic Analysis of Law, suggest that enthusiasm for behavioral law.

What is each investors return on their investment : What is each investor's return on their investment? (Assume Sheldrake makes no dividend or other payments to its shareholders)

Which should be interpreted with caution : Despite these limitations, the study reported some preliminary observations, which should be interpreted with caution.

Create an infographic for petroleos de mexico : Create an Infographic for Petroleos de Mexico that: Determine the appropriate corporate regime and explain why. Submit the corporate name as required

User Account

All Pages