Billy Has a Von Neumann-Morgenstern Utility Function U(c)=c^1/2

question 6

Multiple Choice

Billy has a von Neumann-Morgenstern utility function U(c) =c^1/2.If Billy is not injured this season, he will receive an income of 4 million dollars.If he is injured, his income will be only 10,000 dollars.The probability that he will be injured is .1 and the probability that he will not be injured is .9.His expected utility is

• A)3,620 dollars.
• B)1,810 dollars.
• C)100,000 dollars.
• D)between 3 and 4 million dollars.
• E)7,240 dollars.

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Definitions:

Straddle Position

An investment strategy involving the purchase or sale of both a call option and a put option on the same asset, with identical strike prices and expiration dates, used to bet on volatility.

Delta-hedging

A strategy used in options trading to reduce the risk of price movements of the underlying asset by offsetting positions.

Options Sellers

Parties in an options contract who take on the obligation to buy or sell the underlying asset if the options buyer exercises their right.

Markets

Platforms or systems where buyers and sellers interact to trade goods, services, securities, or other assets.