Question

Given 2 choices: 1. A fair coin toss game of heads: $200 or tails: $0. 2....

Given 2 choices:

1. A fair coin toss game of heads: $200 or tails: $0.

2. Being handed $100 cash

A risk neutral individual will :

prefer choice 1
prefer choice 2
will be indifferent between both choices
none of the above
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Homework Answers

Answer #1

The correct answer is - Will Be Indifferent Between Both Choices

Explanation -

A risk taking individual will prefer a fair coin toss game. A risk averse individual will prefer being handed $100 cash.

Expected winning on toss of coin = Probability of heads * Winning = 0.5 * 200 = $100

Since the expected winning on toss of coin is equal to the amount if cash is chosen, a risk neutral investor will be indifferent between the two choices. The worst case scenario is that the individual gets $100 and the best case scenario is that the individual wins $200.

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