EXERCISE #1: Assuming that you are a RISK TAKER, For each of the following alternatives choose o...
EXERCISE #1: Assuming that you are a RISK TAKER,
For each of the following alternatives choose one of the 2 options by circling either a) or b). For each choice calculate the expected value (EV) and briefly explain your logic. Note the amount certain is also an expected value.
2. a) $50,000
OR
b) 10 coin flips each of which has a
- 50% chance of $8,500 (Heads)
- 50% chance of $2,500 (Tails)
EV = $
Briefly explain your choice: (2 points)
Homework Answers
2. a) Expected Value (EV) = $50,000
(b) Expected value of each flip = 0.5*$8500 + 0.5*$2500 =
$5500
EV of 10 flips = 10*$550 = $55,000
Since EV of option (b) is greater than the EV of option (a), We should choose option(b)
Please do rate me and mention doubts, if any, in the comments section.
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