An investor with 1000 faces two different opportunities 

a A safe one year investment that offers a certain interest rate of 45 while inflation runs at 18 

b A riskier investment which offers the following real payoffs 

a 20 probability of 40 return 

a 30 probability of a 15 return a 5 probability of no return and a 45 probability of a loss of 20 

If the investor is risk neutral would you advise her to take the risky option. Does your answer change if the risky investment requires an upfront fee of 20.

Answer rating: 100% (QA)

i In financial terms risk is defined as the possibility that the real profits from an outco... View the full answer