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Question 4. Suppose that two investments have the same three payoffs, but the probability
associated with each payoff differs, as illustrated in the table below:
Payoff
Probabilities for Investment A
Probabilities for Investment B
$600
0.1
0.3
$500
0.8
0.4
$400
0.1
0.3
(5 points) Find the expected return of each investment.
(5 points) Find the standard deviation of each investment.
(5 points) Bob has the utility function , where I denoted the payoff. Which investment will Bob
choose?
(5 points) Sarah has the utility function . Which investment will Sarah choose?
(5 points) Cathy has the utility function U = 2I. Which investment will Cathy choose?
Payoff Probabilities for Investment A Probabilities for Investment B
$600 0.1 0.3
$500 0.8 0.4
$400 0.1 0.3

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