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7 November, 22:30

Suppose an interest of 5% for two years can be earned on $1,000 saved today with no risk. What is the least amount a person would need to have a 50% chance of winning to be willing to face a 50% chance of losing $1,000 today and be considered risk averse

a. $907.03 to be paid in two years

b. $1,000.01 to be paid in two years

c. $1,100.01 to be paid in two years

d. $1,102.51 to be paid in two years

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Answers (1)
  1. 7 November, 22:39
    0
    d. $1,102.51 to be paid in two years

    Explanation:

    To calculate the given problem, we use the following method

    We are

    Rate (r) = 5% 0.5

    t = 2

    Amount = $1,00

    The least amount the person needs to have to to 50% of winning and 50% of losing is

    = $1,000 * 0.5*2

    =$1,102.51
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