1. An investor needs to decide on a risky short-term investment. He estimates that during the next few months: If conditions are Great (G), he will have a net gain of $400. If conditions are favorable (F), he will have a net gain of $200. If conditions are average (A), he will have a net gain of $100. If conditions are unfavorable (U), he will have a net gain of -$100.If he chooses not to invest his gain is $0 dollars. The probabilities of the conditions (G), (F), (A), and (U) have been assessed as 0.1, 0.2, 0.25, and 0.45, respectively.The investor decides to solve the decision problem using the utility approach. The investor has quantified his attitude towards risk by assessing that: He would be indifferent between a net gain of $200 for certain, and a gamble yielding a net gain of $400 with probability 0.7 and net gain of -$100 with probability 0.3; He would be indifferent between a net gain of $100 for certain, and a gamble yielding a net gain of $200 with probability 0.7 and a net gain of -$100 with probability 0.3. He would be indifferent between a net gain of $0 for certain, and a gamble yielding a net gain of $100 with probability 0.7 and a net gain of -$100 with probability 0.3. a) What is the optimal solution in terms of expected utility?b) What is the certainty equivalent?c) What is the Risk Premium?
