An individual is considering two investment projects. Project A will return a zero profit if condition are poor, a profit of $4 if conditions are good, and a profit of $8 if conditions are excellent. Project B will return of $2 if conditions are poor, aprofit of $3 if conditions are good, and a profit of $4 if conditions are excellent. The probability distribution of conditions is as follows:
Condtions: Poor Good Excellent
Probability: 40% 50% 10%
(a) Using Excel calculate the expected value of each project and identify the preferred project according to this criterion.
(b) Assume that the indivdual's utility function for profit is U(X) =X-0.05X2. Calculate the expected utility of each project and identify the preferred project according to this criterion.
(c) Is this individual risk averse, risk neutral, or risk seeking? Why?