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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
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
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