An investor has an opportunity to play a lottery that depends on the outcome of flipping...
An investor has an opportunity to play a lottery that depends on the outcome of flipping two fair coins (i.e. the probability of each outcome is 50%). If both coins come up tails, the lottery payoff is $20. If one coin comes up heads and the other tails, the lottery payoff is $50. If both coins come up heads, the lottery payoff is $100.
a. Calculate the probability associated with each payoff. What is the expected value of the lottery?
b. What is the maximum amount that a risk-neutral investor would agree to pay for participation in the lottery?
c. What is the maximum amount that an infinitely risk-averse investor would agree to pay for participation in the lottery?
d. What is the maximum amount that a CRRA utility investor with zero initial wealth and ? = 3 would agree to pay for participation in the lottery?
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An investor has an opportunity to play a lottery that depends on
the outcome of flipping...
Rosencrantz and Guildenstern are flipping coins. Guildenstern has a bag with 100 coins in it. All...
Rosencrantz and Guildenstern are flipping coins. Guildenstern has a bag with 100 coins in it. All of them are fair coins, except for 10 that each have heads on both sides and 2 that each have tails on both sides. Guildenstern reaches into the bag without looking, removes a randomly chosen coin, with each of the 100 coins equally likely, and flips it. Give exact answers expressed as simplified fractions. (a) What is the probability that it is one of...
Consider a game in which a coin will be flipped three times. For each heads you will be paid $100. Assume that the...
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Consider a game in which a coin will be flipped three times. For each heads you will be paid $100. Assume that the coin comes up heads with probability 1/3. a. Construct a table of the possibilities and probabilities in this game. Probability Outcome Possibilities 0 heads, 3 tails / 1 heads, 2 tails 2 2 heads, 1 tails 3 3 heads, 0 tails b. Compute the expected value of the game. The expected value of the game is $...
(1 point) Consider a game played by flipping biased coins where the probability of heads is 0.14. You first choose the number of coins you want to flip You must pay $1.5 for each coin you choose to flip. You flip all the coins at the same time. You win $1000 if one or more coins comes up heads How many coins should you flip to maximize your expected profit? Answer: What is your maximum expected profit? Answer: $ (Your...
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would / would not
greater than / less than
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