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Currently Lotta £ 95,000 to invest. She faces the following choice: she can buy shares of AstraZeneca and Ericsson. If she invests in AstraZeneca she will lose £ 30,000 with probability 0.5, but with probability 0.4, she will win £ 35,000, while the probability is 0.1 that the value of shares remains unchanged. If she invests in Ericsson, she will lose only £ 20,000 with probability 0.4, but with probability 0.3, she will win only £ 40,000, while the probability is 0.3 that the value of shares remains unchanged.
a. Can you tell which investment she prefers to do if she is a risk-averse person? Now suppose instead that she can split their investment and may invest 60% of her 95,000 in AstraZeneca and the rest of Ericsson. The assumptions are otherwise unchanged. Which of the three investments will she choose if she is a risk-averse person?
b. Can you tell which investment she prefers to do if she is a risk-neutral person? Now suppose instead that she can split their investment and may invest 40% of her 95000 in AstraZeneca and the rest of Ericsson. The assumptions are otherwise unchanged. Which of the three investments will she choose if she is a risk-neutral person?
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