Clancy Has $4,800

question 4

Multiple Choice

Clancy has $4,800. He plans to bet on a boxing match between Sullivan and Flanagan. He finds that he can buy coupons for $4 each that will pay off $10 each if Sullivan wins. He also finds in another store some coupons that will pay off $10 if Flanagan wins. The Flanagan tickets cost $6 each. Clancy believes that the two fighters each have a probability of of winning. Clancy is a risk averter who tries to maximize the expected value of the natural log of his wealth. Which of the following strategies would maximize his expected utility?

• A) Don't gamble at all.
• B) Buy exactly as many Flanagan tickets as Sullivan tickets.
• C) Buy 600 Sullivan tickets and 400 Flanagan tickets.
• D) Buy 300 Sullivan tickets and 200 Flanagan tickets.
• E) Buy 300 Sullivan tickets and 400 Flanagan tickets.

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Definitions:

Annual Coupon

The interest payment made by a bond issuer to the bondholders, usually annually.

Yield To Maturity (YTM)

The rate of interest earned on a bond if it is held to maturity.

Premium

Premium in finance usually refers to the extra amount paid over the standard or nominal value, as in insurance premium payments or the additional amount to purchase securities.

Discount

A reduction applied to the nominal price of goods, services, or securities, often to incentivize purchase or investment.