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 tall comes up. a. 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. 0.5 million $ b. Would you take the sure $0.3 million or the gamble? Take $0.3 million c. If you chose the sure $0.3 million, would that indicate that you are a risk averter or a risk seeker? Risk averter d. Suppose the payoff was actually $0.3 million-that was the only choice. You now face the choice of Investing it in a U.S. Treasury bond that will return $321,000 at the end of a year or a common stock that has a 50-50 chance of being worthless or worth $750,000 at the end of the year. 1. The expected profit on the T-bond Investment is $21,000. 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- 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 $0.3 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 stock-that is, a 50-50 chance of being worth zero or $7,500 at year-end. 1. Investing in a portfolio of stocks would definitely be a deterioration over Investing in the single stock. II. Investing in a portfolio of stocks would definitely be an improvement over investing in the single stock. III. The situation would be unchanged. -Select- v Would the correlation between returns on these stocks matter? -Select-
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 tall comes up. a. 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. 0.5 million $ b. Would you take the sure $0.3 million or the gamble? Take $0.3 million c. If you chose the sure $0.3 million, would that indicate that you are a risk averter or a risk seeker? Risk averter d. Suppose the payoff was actually $0.3 million-that was the only choice. You now face the choice of Investing it in a U.S. Treasury bond that will return $321,000 at the end of a year or a common stock that has a 50-50 chance of being worthless or worth $750,000 at the end of the year. 1. The expected profit on the T-bond Investment is $21,000. 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- 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 $0.3 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 stock-that is, a 50-50 chance of being worth zero or $7,500 at year-end. 1. Investing in a portfolio of stocks would definitely be a deterioration over Investing in the single stock. II. Investing in a portfolio of stocks would definitely be an improvement over investing in the single stock. III. The situation would be unchanged. -Select- v Would the correlation between returns on these stocks matter? -Select-
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Need Help With Section D & Sub Parts, Thank You!
Transcribed Image Text: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.
a. 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.
$
0.5 million
b. Would you take the sure $0.3 million or the gamble?
Take $0.3 million v
c. If you chose the sure $0.3 million, would that indicate that you are a risk averter or a risk seeker?
Risk averter v
d. Suppose the payoff was actually $0.3 million-that was the only choice. You now face the choice of Investing it in a U.S. Treasury bond that will return $321,000 at the end of a year or a common stock that has a 50-50 chance of being worthless
or worth $750,000 at the end of the year.
1. The expected profit on the T-bond Investment is $21,000. 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-
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 $0.3 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 stock-that is, a 50-50 chance of being worth zero or $7,500 at year-end.
I. Investing in a portfolio of stocks would definitely be a deterioration over investing in the single stock.
II. Investing in a portfolio of stocks would definitely be an improvement over investing in the single stock.
III. The situation would be unchanged.
-Select-
Would the correlation between returns on these stocks matter?
-Select- ▼
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