Given that Tamar is a risk-averse person,she might accept a bet with a 50 percent chance of losing $100 today if she had a 50 percent
A)chance of winning $120 in two years and the interest rate was 11%.
B)chance of winning $114 in two years and the interest rate was 7%.
C)chance of winning $110 in two years and the interest rate was 3%.
D)None of the above are correct;a risk averse person would not accept any of the above bets.

Question

Quizplus · Accepted Answer

A risk-averse person prefers to avoid scenarios with a high likelihood of losing money. The expected value of the bet in option C is equal to the present value of $110 after two years, which is calculated as $110/(1+0.03)^2 = $104.8. Since this expected value is greater than the initial amount she could lose, Tamar might accept this bet. Option A and B have higher potential rewards, but they come with a greater risk of losing money, making them less attractive to a risk-averse person. Option D is incorrect because option C offers a positive expected value.

Given That Tamar Is a Risk-Averse Person,she Might Accept a Bet