Prufrock is risk averse. He is offered a gamble in which with probability 1/4 he will lose $1,000 and with probability 3/4, he will win $500. a) If Prufrock's initial wealth is smaller than $1,500, he will certainly not take the gamble b) Since he is risk averse, he will certainly not take the gamble c) Since the expected value of the gamble is positive, he will certainly take the gamble d) Not enough information is given to determine for sure whether he will take the gamble e) If Prufrock's initial wealth is greater than $1,500, he will certainly take the gamble

Prufrock is risk averse. He is offered a gamble in which with probability 1/4 he will lose $1,000 and with probability 3/4, he will win $500. a) If Prufrock's initial wealth is smaller than $1,500, he will certainly not take the gamble b) Since he is risk averse, he will certainly not take the gamble c) Since the expected value of the gamble is positive, he will certainly take the gamble d) Not enough information is given to determine for sure whether he will take the gamble e) If Prufrock's initial wealth is greater than $1,500, he will certainly take the gamble

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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Concept explainers

Retirement Income

Retirement income is the income received by the retiring person after retirement. Income can either be paid every month or paid annually. The retiree would get a guaranteed income until their death. Retirement income payment differs from person to person based on their investment type and payment method. Some are paid on a lump-sum basis and some are paid in a regular series with fixed payment or variable cash flow. Retirement income can be created from retirement savings, investment, salary, bonus, and wages from employment. Every working individual should plan their retirement income according to their income goals for the future. The plan should be made by identifying suitable income sources, estimating future expenses, applying a savings plan, and managing risk and assets. The most common age for retirement is between 60-65 years.

Question

Prufrock is risk averse. He is offered a gamble in which with probability 1/4 he will lose $1,000 and with
probability 3/4, he will win $500.
a) If Prufrock's initial wealth is smaller than $1,500, he will certainly not take the gamble
b) Since he is risk averse, he will certainly not take the gamble
c) Since the expected value of the gamble is positive, he will certainly take the gamble
d) Not enough information is given to determine for sure whether he will take the gamble
e) If Prufrock's initial wealth is greater than $1,500, he will certainly take the gamble

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In an experiment on risk aversion, a group of people were given the following choice: A) Lose $100 with certainty, or B) 50% chance to win $50, 50% chance to lose $200. An overwhelming majority chose option B. This can be best explained by which of the following? Option B has a smaller expected loss than option A. Option B has an expected gain as opposed to certain loss with option A. This behavior violates the Weak Axiom of Revealed Preference. People have a greater aversion to loss than to risk. This behavior is consistent with risk aversion with losses.
You must choose between investing in Stock A or Stock B. You have already used CAPM to calculate the rate of return you should expect to receive for each stock given each one’s systematic risk and decided that the expected return for both exceeds that predicted by CAPM by the same amount. In other words, both are equally attractive investments for a diversified investor. However, since you are still in school and do not have a lot of money, your investment portfolio is not diversified. You have decided to invest in the stock that has the highest expected return per unit of total risk.If the expected return and standard deviation of returns for Stock A are 10 percent and 25 percent, respectively, and the expected return and standard deviation of returns for Stock B are 16 percent and 36 percent, respectively, which should you choose? Assume that the risk-free rate is 7 percent.
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The value derived from exercising an option immediately is the exercise value. No rational investor would exercise an option that is out-of-the-money, so the minimum exercise value is zero. The following table provides information regarding options on ABC Corp. stock. Because the stock’s price is volatile, investors trade options to either hedge their positions or speculate on price movements. Investors can either buy options or “issue” new options, which is called writing options. Based on your understanding of exercise value and option prices, complete the table with a strike price of $30.00: Stock Price ($) Strike Price ($) Exercise Value ($) Market Price of Option ($) Time Value ($) 20.00 30.00 0.00 1.56 40.00 30.00 12.10 2.10 50.00 30.00 22.40 2.40 55.00 30.00 25.00 27.60 60.00 30.00 34.00 4.00 After two weeks, the stock price of ABC Corp. increases to $62.40. Suppose you purchased the shares for $40.00 and then sell…
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