Suppose you have €100.000 to i

Suppose you have €100.000 to invest. A broker phones you with
some information you
requested on junk bonds. If the company issuing the bonds posts a
profit this year, it will
pay you a 50% interest rate. If the company files for bankruptcy,
you will lose all you invested.
If the company breaks even, you will earn an 8% interest rate. Your
broker tells you that there
is a 40% chance that they will break even, and a 15% chance that
the company will file for
bankruptcy. Your alternative option is to invest in a risk-free
government bond that will
guarantee a 7% interest for one year.
a) What is the expected interest rate for the junk bond
investment?
b) What is the variance of the interest rate of the junk bond
investment?
c) Which investment will you choose if your utility is given by
U(x)=x²?
d) Which investment will you choose if your utility is given by
U(x)=x0.5?

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