An investor estimates the expected return of option A to be $180,000 and its expected utility to be 400.The expected return of option B is $120,000,and its expected utility is 450.The investor should:
A)select option A because it has the higher expected return.
B)select option B because it has the higher expected utility.
C)select option A because 180,000/120,000 450/400.
D)be indifferent between option A and option B.
E)re-analyze the values of expected returns.

Question

An investor estimates the expected return of option A to be $180,000 and its expected utility to be 400.The expected return of option B is $120,000,and its expected utility is 450.The investor should:
A)select option A because it has the higher expected return.
B)select option B because it has the higher expected utility.
C)select option A because 180,000/120,000 > 450/400.
D)be indifferent between option A and option B.
E)re-analyze the values of expected returns.

Quizplus · Accepted Answer

The investor should select option B because it has the higher expected utility. The decision should not be based solely on expected return because the investor's utility function is not necessarily linear with returns. The higher expected utility of option B indicates that it provides greater overall satisfaction to the investor.

An Investor Estimates the Expected Return of Option a to Be