Compute the expected value and the standard deviation
Econometrics
Suppose an investment can yield three possible cash flows with their probabilities given in the parentheses: $600(p=0.5); $-100 (p=0.2) and $800 (p=0.3).
a) Compute the expected value and the standard deviation of this investment. Is this investment risky? Why?
b) The equation E(x)=359 + 0.5SD describes the indifference curve of this investor. Is this investor risk averse, risk neutral, or risk loving? Explain your answer and draw the curve.
c) How much would this person pay for the investment opportunity (certainty equivalent of the current investment)? How much is risk premium for the current investment?
