Question:

Suppose an investor, Erik, is offered the investment opportunities described in the table below. Each investment costs $1,000 today and provides a payoff, also described below, one year from now. Option 1 2 3 Payoff One Year from Now 100% chance of receiving $1,100 50% chance of receiving $1,000 50% chance of receiving $1,200 50% chance of receiving $200 50% chance of receiving $2,000 If Erik is risk averse, which investment will he prefer? o The investor will choose option 1. O The investor will choose option 2. o The investor will choose option 3. O The investor will be indifferent toward these options. In contrast to his brother Erik, Devin is a risk lover (or exhibits risk seeking behavior). Which of the following statements is true about Devin? o Everything else remaining constant, Devin will prefer option 3. O Everything else remaining constant, Devin will prefer option 1. o Everything else remaining constant, Devin will prefer option 2. O None of the above.