1.You play a game that has the following payoffs:

35% probability of winning $1,000

35% probability of losing $1,500

30% probability of winning $550

Use the information above to answer the following questions:

a) What is the expected value of playing the game?

b) Would a risk neutral person play this game? Why or why not?

c) What level of risk tolerance (e.g. risk seeking, risk averse, risk neutral) must a person have to play this game?

d) How much in dollars, would a risk-averse and a risk neutral person need to be paid to play the game. Explain.

e) Which party has a positive risk premium for this game - the game's sponsor or the game's player? Explain.

2.The market portfolio represented by the S&P 500 has a 12% expected return & 20% risk. The risk-free rate = 5% & the investor's risk aversion coefficient A = 2.5.

Use Excel to plot the CAL and the indifference curve. Attach the Excel file to your submission. Identify the optimal compete portfolio on the graph. Hint: There are several steps to solving this, which should be done in Excel. First find the utility of the optimal complete portfolio.