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Question
Suppose a discount bond costs $5,000 today and pays off some amount bin one year. Suppose that bis uncertain according to the following table of probabilities:| b: | $5,000 | $5,500 | $6,000 | $6,500 | $7,000 |
| Probability: | 0.1 | 0.2 | 0.3 | 0.2 | 0.2 |
b. Calculate the expected return.
c.Suppose an investor has a choice between buying this security or purchasing a different security that also costs $5,000 today, but pays off $5,500 with certainty in one year. How is an investor's choice of which security to purchase related to her degree of risk aversion?
Answer
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