Assume that you are faced with an opportunity made up of three equally likely outcomes. If...
Assume that you are faced with an opportunity made up of three equally likely outcomes. If the first outcome occurs, you receive $10. If the second outcome occurs, you receive no money. If the third outcome occurs, you must pay out $1. Given that you can be characterized as risk neutral, how much would you pay to take this risk? Would you be willing to pay more or less for this opportunity? Explain.
Homework Answers
The value of outcome = 1/3 *(10+0 -1) = 3.00
Amount to be paid for risk = 3.00
I would pay less than 3.00 even because max expected return is
3.00
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