Question

1): Assuming that you are RISK AVERSE,

For each of the following 2 alternatives choose one of the 2 options by circling either a) or b). For each choice calculate the expected value (EV) and briefly explain the logic of your choice.

                        1. a) $50,000                                            

                        OR

                        b)    a single coin flip with a

1. 50% chance of $90,000 (Heads)

2. 50% chance of $15,000 (Tails)

EV = $

Briefly explain your choice:

NOTE: use the binomial distribution to assess the probabilities associated with the second option below.

https://stattrek.com/online-calculator/binomial.aspx

2. a) $50,000                                            

                        OR

                        b)    100 coin flips each of which has a

1. 50% chance of $700      (Heads)

2. 50% chance of $400

EV = $

               

Briefly explain your choice:

Answer 1

ANSWER

a)
Value=50000

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

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