Business Maths - Assignment Example

Q1) b) EMV of investing in stocks: = 0.6*2500 + 0.2*500 + 0.2*(1000) =1500+100-200 =$1400 EMV of investing in fixed interest= $1200 Since investing in stocks has a higher EMV of $1400, a risk-neutral investor will choose the option of investing in stocks.c) In this case the $1200 that the investor can earn is fixed and will get it no matter what the state of the economy is whereas if the investor invests in stocks, his investment return will depend on lot of other factors and hence will be uncertain.

An investor has to be compensated with a certainty equivalent to take on the additional risk to invest in stocks. In this case $1200 is the certainty equivalent.d) An investor is an risk-averse investor if his certainty equivalent is less than the expected monetary value since he is willing to accept a smaller sum of money in exchange of steady and stable income. If in the above case, the investor accepts the option of fixed investment, he will be classified as a risk-averse investor.Question 2: b) EMV of established Centre:=0.

2*90000 + 0.4*70000 +0.4*30000=18000+28000+12000= $58000 EMV of new Centre:=0.4*130000 + 0.4*60000 +0.2*(10000)=52000+24000-2000= $74000Since the new Centre has a higher EMV, a risk-neutral investor will locate in the new Centre.c) The perfect changes will directly lead to the decision and there will be no options on the decision tree.