Question

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?

Answer 1

Answer:

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