Question

The odds of winning the Mega Millions jackpot are 1 in 259 million. A Mega Millions ticket always costs $1. (a) Is a lottery ticket a financial asset? Why or why not? (1 point) (b) If the Mega Millions jackpot is currently $350 million, calculate the expected return on a $1 ticket, using the arithmetic average method. Show your work. (Hint: treat the lottery odds as though they’re the distribution of historical returns.) (1 point) (c) Next, estimate the volatility of the Mega Millions ticket. Show your work. (2 points) (d) Najar is a risk-neutral investor: he will always take a fair gamble. What would the minimum value of the Mega Millions jackpot have to be in order for Najar to buy a ticket for $1? Show your work. (1 points)

Answer 1

(a)

Lottery is not an financial asset. Lottery is considered as gambling. Financial assets or investments has risk but returns are also expected. On the other hand, gambling has more chances of getting nothing in return. So, lottery tickets are not a financial assets.

(b)

Expected return = 350,000,000 x 1 / 259,000,000 = 1.35135

So, expected return is 1.35135.

(c)

Volatility is under root of 1.35135 i.e. 1.1624

(d)

Minimum value for Najar to buy a ticket for $1 is 1.1624 (i.e. the rate of volatility)