You are a risk-neutral investor and you have a fair six-sided dice(numbered 1-6) and you are asked to participate in the following gamble. You are allowed to throw the dice a maximum of three times, after each throw you have two choice

A: To throw the dice again

B: To stop and receive $5 per point showing on the dice.

If you throw the dice for the third time you must choose B.

a) What is your optimal strategy, i.e what scores would lead you to stop on the first and second rolls?

b) What is the fair price (assume that you are risk neutral) to pay to enter into this particular gamble?

c) What would be the impact on your answers to parts a) and b) if the number of throws was increased to 5? (You do not need to calculate anything here, although you can if you want)

Answer rating: 100% (QA)

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