Suppose you won the lottery and had two options: (1) receiving $0.3 million or (2) taking a gamble in which, at the flip of a coin, you receive $0.6 million if a head comes up but receive zero if a tail comes up.

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

Would you take the sure $0.3 million or the gamble?

-Select-Take $0.3 millionTake the gambleItem 2

If you chose the sure $0.3 million, would that indicate that you are a risk averter or a risk seeker?

-Select-Risk averterRisk seekerItem 3

Suppose the payoff was actually $0.3 millionthat was the only choice. You now face the choice of investing it in a U.S. Treasury bond that will return $319,500 at the end of a year or a common stock that has a 50-50 chance of being worthless or worth $690,000 at the end of the year. The expected profit on the T-bond investment is $19,500. What is the expected dollar profit on the stock investment? Round your answer to the nearest dollar.

$

The expected rate of return on the T-bond investment is 6.5%. What is the expected rate of return on the stock investment? Round your answer to the nearest whole number.

%

Would you invest in the bond or stock?

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

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 6.5% return on the bond? Round your answer to the nearest whole number. If no exact answer can be obtained, enter 0.

%

How might your decision be affected if, rather than buying one stock for $0.3 million, you could construct a portfolio consisting of 100 stocks with $3,000 invested in each? Each of these stocks has the same return characteristics as the one stockthat is, a 50-50 chance of being worth zero or $6,900 at year-end.

Investing in a portfolio of stocks would definitely be a deterioration over investing in the single stock.

Investing in a portfolio of stocks would definitely be an improvement over investing in the single stock.

The situation would be unchanged.

-Select-IIIIIIItem 8

Would the correlation between returns on these stocks matter?

-Select-YesNoItem 9