suppose you won the lottery and had two options; (1) receiving $0.5 million or (2) taking a gamble in which at the flip of a coin you receive $1 million if a head comes up but receive zero if a tail comes up.

a. what is the expected value of the gamble.

b. Would you take the sure $0.5 million or the gamble?

c If you chose the sure $0.5 million, woud that indicate that you are a risk averter or a risk seeker?

d. Suppose the payoff was actually $0.5 million-that was the only choice. You now face the choice of investing it in a U.S. Treasury bond that will return $537.500 at the end of a year or a common stock that has a 50-50 chance of being worhless or woth $1, 1500, 000 at the end or the year.

1 The expected profit on the T-bond investmetn is $37, 500. What is the expected dollar profit ont he stock investment?

2.The expected rate of return on the T-bond investmetn is 7.5%. What is the expected rate of return on the stock investment?

Would you invest in the bond or the stock? Why?

4 Exactly how large would the expected profit or the expected rate of retun have to be on the stock investment o make you invest in the stock, given the 7.5% return on the bond?

5 How might your decision be affected if, rather than buying one stock for $0.5 million, you could construct a protfolio consisting of 100 stocks with $5,000 invested in each? Each of these stocks has the same return characteristics as the one stock-that is a 50-50 chance of being worth zero or $11, 500 at year end. Would the correlation between returns on these stocks matter? Explain.