Consider the following scenario when answering the following questions: Suppose

Question

Consider the following scenario when answering the following questions:
Suppose that, in an experimental setting, 100 students are presented with two situations involving risk and return. The students are first asked to choose between Gamble A and Gamble B, where:

Gamble A: The student will receive $1 million with a 100 percent probability.

Gamble B: The student will receive $1 million with an 89 percent probability, $5 million with a 10 percent probability, and $0 million (nothing) with a 1 percent probability.

The students are then asked to choose between Gamble C and Gamble D, where:

Gamble C: The student will receive $5 million with a 10 percent probability.

Gamble D: The student will receive $1 million with an 11 percent probability.

A student who is risk neutral would choose Gamble C, which has an expected value of ________, over Gamble D, which has an expected value of ________.

Explanation / Answer

The expected value from Gamble C is 0.10* $5million i.e $0.5million

The expected value from Gamble D is 0.11* $1 i.e $0.11 million

A student who is risk neutral would choose Gamble C, which has an expected value of __$0.5million______, over Gamble D, which has an expected value of ____$0.11____.

Hence Ans) $0.5 million; $0.11 million

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