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Suppose Chris is offered the following gamble: with probability 0.1 he will win $90, with probability...

Suppose Chris is offered the following gamble: with probability 0.1 he will win $90, with probability 0.4 he will win $50, and with probability 0.5 he will lose $60. Chris will:

Multiple Choice

A.  accept this gamble if he is risk-averse, but not if he is risk-neutral.

B. accept this gamble if he is risk neutral, but not if he is risk-averse.

C. accept this gamble if he is either risk neutral or risk-averse.

D. not accept this gamble if he is risk-neutral.

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Answer #1


Chris has probability of 0.1 to win $90 and probability of 0.4 to win $50 and probability of 0.5 to lose $60.

Calculate the expected value -

Expected value = [0.1 * $90] + [0.4 * $50] - [0.5 * $60]

Expected value = $9 + $20 - $30

Expected value = -$1

Risk neutral person will not accept this gamble as expected value is negative indicating loss. He will prefer no profit, no loss situation.

So,

Chris will not accept this gamble if he is risk neutral.

Hence, the correct answer is the option (D).

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