Tim Is Offered Two Gambles

question 48

Multiple Choice

Tim is offered two gambles.With gamble A, he either gains $2 or loses $1 with a 50% probability.With gamble B, he either gains $3 or loses $2 with a 50% probability.Tim prefers gamble B to gamble A.What can we conclude?

• A)Tim is risk loving.
• B)Tim is risk neutral.
• C)Tim is risk averse.
• D)Insufficient information to determine.

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Definitions:

Annual Dividend

The total amount of dividends a company pays to its shareholders in one year, usually presented on a per share basis.

WACC

Weighted Average Cost of Capital; a calculation of a company's cost of capital in which each category of capital is proportionately weighted.

Corporate WACC

The weighted average cost of capital for a corporation, reflecting the cost of its equity and debt financing.

IRR

Internal Rate of Return is a metric used in financial analysis to estimate the profitability of potential investments, representing the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.