Suppose I were to offer you the following choice:

1. $10 for certain or,
2. I flip a fair coin, and give you $5 if it comes up heads and $15 if it comes up tails.

What would a risk-averse person choose? What would a risk-loving person choose? What would a risk-neutral person choose? What would you choose? Are you risk-averse, risk-loving or risk-neutral in this context? What about other contexts?

Would it make any difference if it were:

1. $10000 for certain or,
2. I flip a fair coin, and give you $5000 if it comes up heads and $15000 if it comes up tails.

Why or why not?

What about if it were:$10000 for certain or I flip a fair coin, and give you $0 if it comes up heads and $20000 if it comes up tails?

let's consider the coin flip again.

1. How much is the maximum that you would pay for me to flip a fair coin, and give you $5 if it comes up heads and $15 if it comes up tails?
2. From the different amounts that each student would pay, can you tell who is the most risk-averse and who is the least risk-averse?
3. How would you go about calculating your own level of risk-aversion A in this context? Do you think your level of risk-aversion might be different in a different context? Why or why not?
4. Would an investor be better off to follow an active strategy of stock picking and/or market timing, or a passive strategy of simply buying a fund that tracks the entire market of risky securities? What would you be inclined to do with your money? Why?