Question 1 1.1 A savings & loan (S&L) association can make one of two types of loans. It can loan money on home mortgages, where it has a 75% probability of earning N$100 million and a 25% probability...

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Extracted text: Question 1 1.1 A savings & loan (S&L) association can make one of two types of loans. It can loan money on home mortgages, where it has a 75% probability of earning N$100 million and a 25% probability of earning N$80 million. Alternatively it can loan money to oil speculators, where it has a 25% probability of earning N$400 million and a 75% probability of losing N$160 million (due to loan defaults by the speculators). The manager of the S&L, who will make lending decision, receives 1% of the firm's earnings; he believes that if the S&L loses money, he can walk away from his job without repercussions. Determine the S&L expected return on two investments, compare the S&L manager's expected profits on the two investments, and compare the shareholders' expected profits on the two investments.