HW 6 1) What is the expected value of a $100 bet on a flip of a fair coin, where

Question

HW 6

1) What is the expected value of a $100 bet on a flip of a fair coin, where heads pays double and tails pays zero?

2) Identify at least three possible sources for a risk an individual may face in planning for retirement.

3) What is the probability of tossing a pair of dice once and getting a 1? How about a 7?

4) Calculate the expected value of an investment that has the following payoff frequency: a quarter of the time it will pay $2,000, half of the time it will pay $1,000 and the remaining time it will pay $0.

5) Explain why a riskier asset offers a higher expected return.

6) Explain why a company offering homeowners insurance policies would want to insure homes across a wide geographic area.

7) Considering leverage, can you explain why a mortgage lender would want borrowers to have larger down payments, and when the borrower doesn't the mortgage lender may require mortgage insurance?

8) An individual faces two alternatives for an investment. Asset

Explanation / Answer

1. the chance if 50:50

2. financial risk, health risk and personal support risk

3. both probabilities are 1/9 only

4. the total return will be $3000

5. it is having a higher risk of losing the investment also

6. if a house bunrs and if it spread to other homes within the same area, the total properties will burn

7. that carries equal payment of money with less risk of the asset owing

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