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What is the expected value of this bet

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Reference no: EM131387700

Consider the following bet: A 50% chance of winning $0, a 40% chance of winning $10, and a 10% chance of winning $100.

(a) What is the expected value of this bet?

(b) What is the variance of the bet?

(c) If a ticket for this bet cost $15, would a risk averse person be willing to take the bet? Why or why not?

(d) Now consider a person with the following utility as a function of wealth: U = 10 × W2 , where W is wealth. Suppose that they have a current wealth is $1000. What is their current utility?

(e) What would their expected utility be if they took the bet described?

(f) Would the person described in (d) take the bet or not? What do you conclude?

Reference no: EM131387700

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