Expected returns Suppose you won the lottery and had two options: (1) receiving

Question

Expected returns Suppose you won the lottery and had two options: (1) receiving $2 million or (2) taking a gamble in which at the flip of a coin you receive $4 million if a head comes up but receive zero if a tail comes up. a. What is the expected value of the gamble? Round your answer to two decimal places. Would a risk averse investor take the sure $2 million or the gamble? If the investor chose the sure $2 million, would that indicate that he is a risk averter or a risk seeker? Suppose the payoff was actually $2 million - that was the only choice. You now face the choice of investing it in a U.S. Treasury bond that will return $2.160.000 at the end of a year or a common stock that has a 50-50 chance of being worthless or worth $4.600.000 at the end of the year. The expected profit on the T-bond investment is $160.000. What is the expected dollar profit on the stock investment? Round your answer to two decimal places. The expected rate of return on the T-bond investment is 8%. What is the expected rate of return on the stock investment? Assume a correlation between stocks of less than 1. Round your answer to two decimal places. Should an individual invest in the bond or stock? Assume a correlation between stocks of less than 1.

Explanation / Answer

a.
expected value = (0.5 * 4 million) + (0.5 * 0) = 2 million

b.
will take the 2 million. as standard deviation of this option is zero against the game. and risk in the first option is zero

c.
would indicate that he is risk averse

d.
1.
expected value of stock = (0.5 * 4600000) + (0.5 * 0) = 2300000
expected dollar profit = 2300000 - 2000000 = 300000

2.
rate of return on stock = 300000/2000000 = 15%

3.
he should invest in stock if he is not risk averse

please rate my answer!
thanks in advance :)

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.