1.This statement is uncertain, as investment decision is not merely based on return provided by security as risk is equally important for investors (İmrohoroğlu and Tüzel, 2014). Therefore, investment option with highest expected return will not always be selected as not all investors are risk averse.
2.True. Sum of all probabilities of possible events in mathematics or statistics is considered to be one (Dudley, 2018).
3.False. A risk averse person always aim to generate high return by taking risk on the investment. Further, gambling is highly risk associated and tend to provide high returns in contrast to risk taken by person (Deck, Lee and Reyes, 2014).
4.The provided statement is true as in uncertain situation it seem intuitive for individuals to maximize their expected utility as it is directly associated with their level of satisfaction (Diamond and Rothschild, 2014).
5.Saving by taking risk
Probability of being caught 1/10
There probable possibility of fine:
=1/10*50(Value of fine)
5.No statement is not true as this fine is not sufficient to deter person from double parking as their earning capacity is higher than probability of imposition of fine.
6.Let say an investor is having two options having following risk and return:
Company A Company B
Risk 16% 12%
Return 10% 10%
By considering the given information it can be noticed that investment in Company B is more preferable because on similar risk, investment is able to generate high returns. However, at the time of investment there is news in market that due to alleged actions Company B is fined with huge penalty and same had affected their market position. With this news, decision of the investor will be modified as it is more probable that Company A will deliver high returns as the new information will change the probability of occurrence of existing possible investment outcome.
7.Indifference curve assist in the selection of the best portfolio of the investor (Levy, 2015). The indifference curve shows the priority in terms of risk and return. This curve can be built by the two dimensional graph. In this graph, generally the horizontal axis represents the risk which is determined by the variance or the standard deviation and the vertical axis represent the reward which is based on the expected return.
On each unit of the risk grow the requirement of the return by the investor also increases. On the basis of the utility function, as and when the risk grows, the demand for the return also grows simultaneously so that the utility function can be remain the same (Jindapon and Whaley, 2015). By implementing the indifference curve method the concept can be easily understand. At the definite period of time, the requirement of the risk and return by the investor can be known by the indifference curve. The different types of indifference curve for the varied investor is shown below-
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