Option Payoff One Year from Now 1 100% chance of receiving $1,100 2 50% chance of receiving $1,000 50% chance of receiving $1,200 3 50% chance of receiving $200 50% chance of receiving $2,000 If Erik is risk averse, which investment will he prefer?

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Business

Enrique Hernandez

10 May, 09:34

Option Payoff One Year from Now 1 100% chance of receiving $1,100 2 50% chance of receiving $1,000 50% chance of receiving $1,200 3 50% chance of receiving $200 50% chance of receiving $2,000 If Erik is risk averse, which investment will he prefer?

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Answers (1)

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Jaylon Mckinney · Answer 1

First one

Explanation:

1) $1100

2) 0.5 (1000) + 0.5 (1200)

= $1100

3) 0.5 (200) + 0.5 (2000)

= $1100

Since all expected values are equal.

He should go for the first one, to avoid risks