A Decision Maker's Worst Option Has an Expected Value of $1,000

question 7

Multiple Choice

A decision maker's worst option has an expected value of $1,000, and her best option has an expected value of $3,000. With perfect information, the expected value would be $5,000. The decision maker has discovered a firm that will, for a fee of $1,000, make her position-risk free. How much better off will her firm be if she takes this firm up on its offer?

• A)$5,000
• B)$4,000
• C)$3,000
• D)$2,000
• E)$1,000

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Definitions:

Bonds

Fixed-income investment products representing loans made by an investor to a borrower, typically corporate or governmental, which borrows the funds for a defined period at a variable or fixed interest rate.

Common Shares

Equity securities that represent ownership in a corporation, giving holders voting rights and a share in the company's profits.

Financing Activities

Activities that result in changes in the size and composition of the contributed equity and borrowings of the entity.

Loss on Sale

A situation where the proceeds from selling an asset are less than its book value, resulting in a financial loss for the entity.