Question
If you are risk-neutral (that is, neither seek out nor shy away from risk) which of the following options should you choose to maximize your
If you are risk-neutral (that is, neither seek out nor shy away from risk) which of the following options should you choose to maximize your expected return? (Hint: to calculate the expected return of an outcome, multiply the probability that an event will occur by the outcome of that event).
Complete the following table:
Option | Investment | Interest | Total Payoff | Probability | Expected Total Payoff |
1 | 10,000 | 2% | 10,000(1.02)= | 1 |
|
2 | 10,000 | 5% | 10,000(1.05)= | 0.9 |
|
3 | 10,000 | 8% | 10,000(1.08)= | 0.93 |
|
4 | 10,000 | 0% | 10,000(1.0) = | 1 |
|
Which option would you choose? __________________
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