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) There is not enough information to answer this question.

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) There is not enough information to answer this question.

Quizplus · Accepted Answer

The investor should choose option B because it has the higher expected utility, even though its expected return is lower than that of option A. Utility is a measure of the investor's personal satisfaction or happiness, rather than just the financial outcome. In this case, the higher utility of option B outweighs the slightly lower expected return.

An Investor Estimates the Expected Return of Option a to Be