Question

A risk-neutral individual _____.

A. prefers a sure return to an uncertain prospect generating the same expected return

B. will forgo a sure return in favor of an uncertain prospect generating the same expected return

C. is indifferent between a sure return and an uncertain prospect generating the same expected return

D. will avoid all risky investments no matter what the return

Answer 1

Answer: Option C

A risk-neutral individual is always indifferent between the gains and the losses and chooses the options which are between the both. A consolidated decision will be taken by the risk-neutral individual. For example, the calculation of expected monetary benefits is done to identify the returns for all the alternatives based on the probabilities. Finally, the one alternatives with the highest expected monetary value will be chosen. So, risk neutral individual takes both risks and benefits into the picture before deciding.