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. Which kind of stock is most affected by changes in risk aversion? High-beta stocks Low-beta stocks All stocks are affected the same, regardless of beta. Medium-beta stocks
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. Which kind of stock is most affected by changes in risk aversion? High-beta stocks Low-beta stocks All stocks are affected the same, regardless of beta. Medium-beta stocks
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.
Which kind of stock is most affected by changes in risk aversion?
High-beta stocks
Low-beta stocks
All stocks are affected the same, regardless of beta.
Medium-beta stocks
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