Suppose you won the lottery and had two options: (1) receiving $0.8 million or (2) taking a gamble in which, at the flip of a coin, you receive $1.6 million if a head comes up but receive zero if a tail comes up.

1. What is the expected value of the gamble? Enter your answer in millions. For example, an answer of $500,000 should be entered as 0.5. Round your answer to one decimal place.

   $ million

2. Would you take the sure $0.8 million or the gamble?

   -Select-Take $0.8 millionTake the gambleItem 2

3. If you chose the sure $0.8 million, would that indicate that you are a risk averter or a risk seeker?

   -Select-Risk averterRisk seekerItem 3

4. Suppose the payoff was actually $0.8 million - that was the only choice. You now face the choice of investing it in a U.S. Treasury bond that will return $856,000 at the end of a year or a common stock that has a 50-50 chance of being worthless or worth $1,920,000 at the end of the year.
   1. The expected profit on the T-bond investment is $56,000. What is the expected dollar profit on the stock investment? Round your answer to the nearest dollar.

      $

   2. The expected rate of return on the T-bond investment is 7%. What is the expected rate of return on the stock investment? Round your answer to the nearest whole number.

      %

   3. Would you invest in the bond or stock?

      -Select-BondStockThis depends on the individual's degree of risk aversion.Item 6

   4. Exactly how large would the expected profit (or the expected rate of return) have to be on the stock investment to make you invest in the stock, given the 7% return on the bond? Round your answer to the nearest whole number. If no exact answer can be obtained, enter 0.

      %

   5. How might your decision be affected if, rather than buying one stock for $0.8 million, you could construct a portfolio consisting of 100 stocks with $8,000 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 $19,200 at year-end.
      1. Investing in a portfolio of stocks would definitely be a deterioration over investing in the single stock.
      2. Investing in a portfolio of stocks would definitely be an improvement over investing in the single stock.
      3. The situation would be unchanged.

      -Select-IIIIIIItem 8

      Would the correlation between returns on these stocks matter?

      -Select-YesNo