Given that Isabella is a risk-neutral person, she might accept a bet with a 50 p

Question

Given that Isabella is a risk-neutral person, she might accept a bet with a 50 percent chance of losing $100 today if she had a 50 percent chance of winning $114.50 in two years and the interest rate was 7%. chance of winning $110 in two years and the interest rate was 3%. chance of winning either $114.50 in two years with a 7% interest rate, or $110 in two years with a 3% interest rate. chance of winning $120 in two years and the interest rate was 11%. a risk averse person would not accept any of the other bets.

Explanation / Answer

Solution Chance of winning $110 in two years and the interest rate was 3%

Explanation: Among the given options since Isabella is a risk neutral person thus would earn $110 in two years (= 50% * 2 years * 110) when interest rate is 3%

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