I. Clearly explain why each of the following is True, False or Uncertain
1) A person will always choose the investment alternative with the highest expected return.
2) If there are three possible outcomes to an uncertain decision, the probability of the outcomes will sum
to a value greater than 1.0
3) A person who is always risk-averse will never gamble.
4) A rational person would always maximize his/her utility in an uncertain situation.
5) Assume the value of a risk-averse person’s time is $100 per hour and it would save her 20 minutes to
double-park. Also, assume there is a one-in-ten chance that the person would be caught and have to
pay a fine. A $50 fine would be sufficient to deter this person from double parking?
II. Discussion Questions and Quantitative Problems
6) Explain with a numerical example how you would assess the value of information. Contrast a situation
where the new information affects your knowledge of the outcome of the decision with one where it
affects the probability of the outcome.
7) Using a diagram, explain how a highly risk-averse person would make the choice between the risk and
return of an investment. Be sure to discuss how the shape and position of the indifference curve map
reflects this risk aversion. Also make sure to discuss both types of trade-offs involved
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