Question

XERCISE #2: Assuming that you are RISK AVERSE,

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.

1. a)    $50,000                                            

                        OR

                        b)    a single coin flip with a

1. 50% chance of $65,000 (Heads)
2. 50% chance of $30,000 (Tails)

EV = $

                        Briefly explain your choice:

                                     

Answer 1

a)
Value=50000

b)
Expected Value EV=0.5*65000+0.5*30000=47500

c)
Choose Option a) as it has higher expected value