Suppose That,in an Experimental Setting,100 Students Are Asked to Choose

question 2

Multiple Choice

Suppose that,in an experimental setting,100 students are asked to choose between Gamble A and Gamble B,where:
Gamble A: The student will receive $5,100 with a 70% probability and $200 with a 30% probability.
Gamble B: The student will receive $5,100 with a 50% probability,$200 with a 25% probability,and $0 (nothing) with a 25% probability.
What is the expected value of Gamble B?

• A) EV = 0.7 × ($5,100) + 0.3 × ($200)
• B) EV = 0.5 × ($5,100) + 0.25 × ($100) + 0.25 × ($25)
• C) EV = 0.5 × ($5,100) + 0.25 × ($200) + 0.25 × ($25)
• D) EV = 0.5 × ($5,100) + 0.25 × ($200) + 0.25 × ($0)
• E) EV = 0.5 × ($2,600) + 0.25 × ($2,600) + 0.25 × ($0)

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Definitions:

Future Investment Opportunity

Potential projects or investments that a company could undertake in the future, which are expected to generate positive returns.

Net Present Value

A financial metric that calculates the value of a projected investment's net cash flows, discounted back to their present value.

Cash Flow

A measure of the amount of cash generated and used by a company in a given period, vital for assessing the health and liquidity of a business.

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