Consider a lottery with three possible outcomes: a payoff of -20, a payoff of 0, and a payoff of 20. The probability of each outcome is 0.2, 0.5, and 0.3, respectively. Compute the expected value of the lottery, variance and the standard deviation of the lottery. (10 marks) b) Given the start-up job offer lottery, one payoff (I1) is RM110,000, the other payoff (I2) is RM5,000. The probability of each payoff is 0.50, and the expected value is RM55,000. Utility function is given by U(I) = √I Equation: pU(I1) + (1-p)U(I2) = U(EV – RP) Compute the risk premium by solving for RP.
