Suppose an investor, Erik, is offered the investment opportunities described in the table below. Each investment costs $1,000 today and provides a payoff, also described below, one year from now. Option Payoff One Year from Now 1 100% chance of receiving $1,100 2 50% chance of receiving $1,000 50% chance of receiving $1,200 3 50% chance of receiving $200 50% chance of receiving $2,000 If Erik is risk averse, which investment will he prefer? The investor will choose option 1. The investor will choose option 2. The investor will choose option 3. The investor will be indifferent toward these options. In contrast to his brother Erik, Devin is a risk lover (or exhibits risk seeking behavior). Which of the following statements is true about Devin? Everything else remaining constant, Devin will prefer option 3. Everything else remaining constant, Devin will prefer option 2. Everything else remaining constant, Devin will prefer option 1. None of these options is preferred.
Suppose an investor, Erik, is offered the investment opportunities described in the table below. Each investment costs $1,000 today and provides a payoff, also described below, one year from now. Option Payoff One Year from Now 1 100% chance of receiving $1,100 2 50% chance of receiving $1,000 50% chance of receiving $1,200 3 50% chance of receiving $200 50% chance of receiving $2,000 If Erik is risk averse, which investment will he prefer? The investor will choose option 1. The investor will choose option 2. The investor will choose option 3. The investor will be indifferent toward these options. In contrast to his brother Erik, Devin is a risk lover (or exhibits risk seeking behavior). Which of the following statements is true about Devin? Everything else remaining constant, Devin will prefer option 3. Everything else remaining constant, Devin will prefer option 2. Everything else remaining constant, Devin will prefer option 1. None of these options is preferred.
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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Suppose an investor, Erik, is offered the investment opportunities described in the table below. Each investment costs $1,000 today and provides a payoff, also described below, one year from now.
|
Option
|
Payoff One Year from Now
|
|---|---|
| 1 | 100% chance of receiving $1,100 |
| 2 | 50% chance of receiving $1,000 |
| 50% chance of receiving $1,200 | |
| 3 | 50% chance of receiving $200 |
| 50% chance of receiving $2,000 |
If Erik is risk averse, which investment will he prefer?
The investor will choose option 1.
The investor will choose option 2.
The investor will choose option 3.
The investor will be indifferent toward these options.
In contrast to his brother Erik, Devin is a risk lover (or exhibits risk seeking behavior). Which of the following statements is true about Devin?
Everything else remaining constant, Devin will prefer option 3.
Everything else remaining constant, Devin will prefer option 2.
Everything else remaining constant, Devin will prefer option 1.
None of these options is preferred.
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