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The Financial Advisor is a weekly column in the local newspaper. Assume you must answer the following question. “I recently retired at age 65, and I have a tax-free retirement annuity coming due soon. I have three options. I can receive (A) $30,976 now, (B) $359.60 per month for the rest of my life, or (C) $513.80 per month for the next 10 years. What should I do?” Ignore the timing of the monthly cash flows and assume that the payments are received at the end of year. Assume the 10-year annuity will continue to be paid to loved heirs if the person dies before the 10-year period is over.
(a) If interest rate i = 6%, develop a choice table for lives from 5 to 30 years. (You do not know how long this person or other readers may live.)
(b) If i = 10%, develop a choice table for lives from 5 to 30 years. (You do not know how long this person or other readers may live.)
(c) How does increasing the interest rate change your recommendations?
The best measure to use for measuring the risk of a random variable would be:
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