onsider an individual who is choosing how much of her wealth to put into a risky asset which

pays a 10% return in one state of the world (which we will call the 'good state of the world') but yields a 5% loss in a different state of the world (which we will call the bad state of the world'). The individual can alternatively put her wealth into a risk-free asset which pays a guaranteed 2% return.

Fill in the blanks below, and show any computations you use to come up with the answers:

If the individual moves $__________ out of the risk-free asset into the risky asset, then she will

earn an additional $1 in the good state, but by moving this amount into the risky asset, she will

have given up $___________ in the bad-state.