Below is an example of a lottery. Which gamble would a gambler trying to maximize expected value choose? Which gamble would a gambler trying to maximize expected utility with
U(gamble)=p(gamble) choose? How does risk aversion impact the gambler's decision?
Gamble A: Win $240 with a 100% chance
Gamble B: Win $400 with a 50% chance, Win $100 with a 50% chance
Below is an example of a lottery. Which gamble would a gambler trying to maximize expected...
Lottery - Let $1,000 be your current wealth. There are 100 people and each buys a lottery ticket at $5. The administrative cost of the lottery ticket per person is $5. If you win the lottery, you will get $500. There is only one person who can win the lottery. a. Define the gamble b. Calculate the expected value of the gamble c. Is this gamble favorable, fair, or unfavorable? d. Now, suppose your utility function is U = W5/2....
Risk averse people are willing to pay LESS THAN the monetary value of a gamble 4. What is the maximum you would be willing to pay for lottery that offers a 25% chance of winning $100 and a 75% chance of winning 0? The EMV = $25. Would you pay $25? Your risk averse preferences are u(x) = x1/2 What is the most you would pay to play this gamble? Provide a Utility of Wealth Diagram
2. Consider two lotteries, A and B. With lottery A, there is a 0.90 chance that you receive a payoff of S0 and a 0.10 chance that you receive a payoff of $400. With lottery B, there is a 0.50 chance that you receive a payoff of S30 and a 0.50 chance that you receive a payoff of $50, a) Verify that these two lotteries have the same expected value but that lottery A has a bigger variance than lottery...
2. Expected returns Suppose you won the lottery and had two options: (1) receiving $1 million or (2) a gamble in which you would receive $2 million if a head were flipped but zero is a tail came up. a. What is the expected value of the gamble? b. Would you take the sure $1 million or the gamble? c. If you chose the sure $1 million, would that indicate that you are a risk averter or a risk seeker?...
Please solve and explain 15-4 Suppose you win the Florida lottery and are offered a choice of $500,000 in cash or a gamble in which you would get $1 million if a head is flipped but zero if a tail comes up. What is the expected value of the option? Would you take the sure $500,000 or the coin flip? If you choose the sure $500,000, are you a risk averter or a risk seeker? Suppose you take the sure $500,000. You...
bling Chuck has risk-loving preferences, Uc(w) W2, and sometimes plays scratch-off tickets. Geraldine, Jack's sister, is risk averse with a utility function, UG(W)-W2. The chance for winning a prize is 1/10 and the price of the scratch-off ticket is $5. Each of them has an initial wealth of 100. What is the smallest prize that will cause Chuck to buy a ticket? What would be the expected payout of this $5 gamble? What is the smallest prize that will cause...
1. a. Two investors, A and B, are evaluating the same investment opportunity, which has an expected value of £100. The utility functions of A and B are ln(x) and x2, respectively. Which investor has a certainty equivalent higher than 100? Which investor requires the higher risk premium? b. (i) Describe suitable measures of risk for ‘loss-aversion’ and ‘risk aversion’. (ii) Concisely define the term ‘risk neutral’ with respect to a utility function u (w), where w is the realisation...
You are trying to get the cheapest airfare to reach your hometown. You just found on makemytrip.com that the ticket home will cost $400, and it cannot be refunded or exchanged. You also have the option of buying a ticket for $450, which can be refunded for $350 (and thus costs you $100). The price of tickets is expected to change in one week, and you will have one more chance to buy a ticket. There is a 50% chance...
1. Bond valuation Callaghan Motors' bonds have 10 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 5 percent. The bonds have a yield to maturity of 10 percent. What is the current market price of these bonds? 2. Expected returns Suppose you won the lottery and had two options: (1) receiving $1 million or (2) a gamble in which you would receive $2 million if a head...
answer all.
For the next question, assume an investor with the following utility function U-E)-3/2) 12. To maximize her expected uility, she would choose the set with an espect rate of return of and a standard deviation ofrspectively A. 1296; 20% B. 10%; 15% C. 1056; 1056 D, 8%, 10% Е.none ofthe above 13. Which of the following statements regarding the Capital Allocation Line (CAL) false? A. The CAL shows risk-return combinations. B. The slope of the CAL equals the...