Prufrock Is Risk Averse

question 21

Multiple Choice

Prufrock is risk averse.He is offered a gamble in which with probability 1/4 he will lose $1,000 and with probability 3/4, he will win $500.

• A)Since he is risk averse, he will certainly not take the gamble.
• B)Since the expected value of the gamble is positive, he will certainly take the gamble.
• C)If Prufrock's initial wealth is greater than $1,500, he will certainly take the gamble.
• D)If Prufrock's initial wealth is smaller than $1,500, he will certainly not take the gamble.
• E)Not enough information is given to determine for sure whether he will take the gamble.

---

Definitions:

Net Present Value

A calculation that compares the value of all cash inflows and outflows of a project or investment by discounting them to their present value.

Straight-Line Depreciation

A technique for distributing the expense of a physical asset across its lifespan in consistent yearly installments.

Required Rate Of Return

The rate that is generally based on the company’s cost of capital.

Operating Costs

Expenses associated with the day-to-day functions of a business, excluding costs related to production.