5. Investor attitudes toward risk

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.

If Erik is indifferent about these three investment options, and he thinks that they are worth the same to him. Therefore, which of the following statements is true about Erik?

A. He is risk-neutral.

B. He is risk-averse.

C. He is risk-loving.

D. None of the above.

Which kind of stock is most affected by changes in risk aversion? (In other words, which stocks have the biggest change in their required returns?)

A. Medium-beta stocks

B. High-beta stocks

C. Low-beta stocks

D. All stocks are affected the same, regardless of beta.