Question

Suppose an investor, Erik, is offered the investment opportunities described in the table below. Each investment costs $1,000 today and provides a payoff, also described below, one year from now.

Option	Payoff One Year from Now
1	100% chance of receiving $1,100
2	50% chance of receiving $1,000
	50% chance of receiving $1,200
3	50% chance of receiving $200
	50% chance of receiving $2,000

If Erik is risk averse, which investment will he prefer?

The investor will choose option 1.

The investor will choose option 2.

The investor will choose option 3.

The investor will be indifferent toward these options.

In contrast to his brother Erik, Devin is a risk lover (or exhibits risk seeking behavior). Which of the following statements is true about Devin?

Everything else remaining constant, Devin will prefer option 3.

Everything else remaining constant, Devin will prefer option 2.

Everything else remaining constant, Devin will prefer option 1.

None of these options is preferred.

Answer 1