Question

In the probability discussion post, you were presented with two options:, the post is reproduced below: o “ Suppose you're offered two chances to win money based on a simple coin flip: ▪ Option 1: If the coin lands heads, you get $5. If it lands tails, you lose $2. ▪ Option 2: If the coin lands heads, you get $15,000. If it lands tails, you lose $6,000.” • The expected value of Option 1 turned out to be +$1.50, and the expected value of Option 2 turned out to be +$4500. • Several people said that they would prefer Option 2, because the average expected result is much greater than for Option 1. However, quite a few people said they would prefer Option 1, because they were risk-averse (the prospect of losing $6000 was too hard to hear). • The standard deviation of the two possible results in option 1 is 3.5; the standard deviation of the possible results in option 2 is 10,500. • Explain what standard deviation measures, why it is associated with risk, and what it would mean for an option (like the other two above) to have a standard deviation of 0.

Answer 1