Question

Suppose a bank has $100 million of assets to invest in either risky or safe investments. The first option is to put all assets in the safe investment, which will result in a 5% return and yield $105 one year from now. A second option is to put all the assets in the risky option, which will result in either a 50% return ($150 million) or a 40% loss ($60 million) with equal probability. If the bank can pay to insure itself against losses, what is the maximum it would be willing to pay under the risky option? Group of answer choices

a. $45 million

b. $40 million

c. $25 million

d.$20 million

Answer #1

Suppose a bank has $100 million of assets to invest in either
risky or safe investments. The first option is to put all assets in
the safe investment, which will result in a 5% return and yield
$105 one year from now. A second option is to put all the assets in
the risky option, which will result in either a 50% return ($150
million) or a 40% loss ($60 million) with equal probability. A
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