Cameron is an investor trying to decide among the following three different inve

Question

Cameron is an investor trying to decide among the following three different investment options.

Option A:
Price today: $1000
One year from today Cameron will receive one of the following payments:
$1,250 with a probability of 90%
$1,000 with a probability of 8%
$0 with a probability of 2%

Option B:
Price today: $1000
One year from today Cameron will receive one of the following payments:
$4,000 with a probability of 30%
$1,000 with a probability of 50%
$0 with a probability of 20%

Option C:
Price today: $1000
One year from today Cameron will receive one of the following payments:
$2,000 with a probability of 33%
$1,000 with a probability of 34%
$0 with a probability of 33%

b. Which of the options has the highest risk? Why?

Explanation / Answer

If he is risk adverse, he would choose option A as it has the least probability that he gets back $0

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