4. Risk aversion

Erik is an investor with $5,000 available for investment. He has the following three investment possibilities from which to choose:

Option	Scenarios
1	Keep the $5,000 in cash for one year.
2	Invest in a friends business with a
	50% chance of getting $10,000 after one year and a
	50% chance of getting nothing.
3	Invest in a relatives business with a
	30% chance of getting $15,000 after one year,
	20% chance of getting $2,500 after one year,
	50% chance of getting nothing.

Suppose Erik cares about the risk involved in options 2 and 3, and decides to select option 1 because it has no risk. Which of the following statements would be true about Erik?

He is risk-averse.

He is risk-neutral.

He is risk-loving.

None of these descriptions is accurate.

Later, while examining the same investment alternatives, Eriks brother, Devin, clearly expressed a preference for option 1. Which of the following statements is true about Devin?

He is risk-averse.

He is risk-neutral.

He is risk-loving.

None of the above.