Erik is an investor with $5,000 available for investment. He has the following three investment possibilities from which to choose: Option Scenarios 1 Keep the $5,000 in cash for one year. 2 Invest in a friend’s business with a 50% chance of getting $10,000 after one year and a 50% chance of getting nothing. 3 Invest in a relative’s business with a 30% chance of getting $15,000 after one year, 20% chance of getting $2,500 after one year, 50% chance of getting nothing. If Erik is indifferent about these three investment options, and he thinks that they are worth the same to him. Therefore, which of the following statements is true about Erik? He is risk-neutral. He is risk-averse. He is risk-loving. None of these descriptions is accurate. Later, while examining the same investment alternatives, Erik’s brother, Devin, clearly expressed a preference for option 1. Which of the following statements is true about Devin? He is risk-averse. He is risk-neutral. He is risk-loving. None of the above.
Erik is an investor with $5,000 available for investment. He has the following three investment possibilities from which to choose: Option Scenarios 1 Keep the $5,000 in cash for one year. 2 Invest in a friend’s business with a 50% chance of getting $10,000 after one year and a 50% chance of getting nothing. 3 Invest in a relative’s business with a 30% chance of getting $15,000 after one year, 20% chance of getting $2,500 after one year, 50% chance of getting nothing. If Erik is indifferent about these three investment options, and he thinks that they are worth the same to him. Therefore, which of the following statements is true about Erik? He is risk-neutral. He is risk-averse. He is risk-loving. None of these descriptions is accurate. Later, while examining the same investment alternatives, Erik’s brother, Devin, clearly expressed a preference for option 1. Which of the following statements is true about Devin? He is risk-averse. He is risk-neutral. He is risk-loving. None of the above.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Risk aversion
Erik is an investor with $5,000 available for investment. He has the following three investment possibilities from which to choose:
|
Option
|
Scenarios
|
|---|---|
| 1 | Keep the $5,000 in cash for one year. |
| 2 | Invest in a friend’s business with a |
| 50% chance of getting $10,000 after one year and a | |
| 50% chance of getting nothing. | |
| 3 | Invest in a relative’s business with a |
| 30% chance of getting $15,000 after one year, | |
| 20% chance of getting $2,500 after one year, | |
| 50% chance of getting nothing. |
If Erik is indifferent about these three investment options, and he thinks that they are worth the same to him. Therefore, which of the following statements is true about Erik?
He is risk-neutral.
He is risk-averse.
He is risk-loving.
None of these descriptions is accurate.
Later, while examining the same investment alternatives, Erik’s brother, Devin, clearly expressed a preference for option 1. Which of the following statements is true about Devin?
He is risk-averse.
He is risk-neutral.
He is risk-loving.
None of the above.
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