Problem 1 If you were to gamble on whether a company will complete its IPO, and

Question

Problem 1 If you were to gamble on whether a company will complete its IPO, and you can structure your bet of $2M so the profit/loss can be summarized as following table.

You Bet

Complete Withdrawn

Company’s decision Complete $4M -$2M

Withdrawn -$2.5M $3M

Assume the probability that the company will complete its IPO is 0.4. Answer the following question. a. What is the expected profit, if you bet on ’Complete’?
b. What is the expected profit, if you bet on ’Withdrawn’?
c. If you can only bet one side (either ’complete’ or ’withdrawn’), what will you do to maximize your expected profit?

d. What is the variance of the profit, if you bet on ’Complete’?
e. What is the variance of the profit, if you bet on ’Withdrawn’?
f. If you can only bet one side (either ’complete’ or ’withdrawn’), what will you do to minimize your risk?

Explanation / Answer

a) Expected profit = 0.4*4 -0.6*2.5 = 0.1

b) Expected profit = 0.4*(-2)+0.6*3 = 1.0

c) We should bet on withdrawn to maximise the profit

d) Variance = 0.4*(4-0.1)^2+0.6*(-2.5-0.1)^2=10.14

e) Variance = 0.4*(-2-1)^2+0.6*(3-1)^2=6

We should bet on withdrawn to minimize the risk.

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.