Business, 17.06.2021 21:20, nehakarakkattu

Gavin Jones's friend is planning to invest $1 million in a rock concert to be held 1 year from now. The friend figures that he will obtain $3 million revenue from his $1 million investment - unless, my goodness, it rains. If it rains, he will lose his entire investment. There is a 50% chance that it will rain the day of the concert. Gavin suggests that he buy rain insurance. He can buy one unit of insurance of $0.50, and this unit pays $1 if it rains and nothing if it does not. He may purchase as many units as he wishes, upto $3 million. i. What is the expected rate of return on his investment if he buys u units of insurance? (the cost of insurance is in addition to his $1 million investment) ii. What units of insurance will minimize the variance of his return? iii. What is this minimum value? iv. And what is the corresponding expected rate of return?

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Gavin Jones's friend is planning to invest $1 million in a rock concert to be held 1 year from now....