ADMS 3300 Study Guide - Final Guide: Net Present Value, Emv, Cardinal Utility

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Order of questions does not follow the order of chapters in the text book: you must hand in this exam before leaving the examination room. Failure to do so will result in an automatic f grade as well as a letter. This exam contains 20 pages (including cover page and formula page). Jim, a risk-neutral investor has some funds available to invest in one of the following choices, high-risk (h), moderate-risk (m) or low-risk (l) stock, to maximize his earnings. His payoff for the three stocks depends on how the market moves. Market can rise or decline; there are 40% chances that market will decline. If market is rising (r), he will earn from high-risk stock, from moderate-risk and from low-risk stock. To answer this question, draw a new tree assuming that you already have a wizard to tell you the future.