Suppose interest of 5% for two years can be earned on $1,000 saved today with no risk. What is the least amount a person would need to have a 50% chance of winning to be willing to face a 50% chance of losing $1,000 today and be considered risk averse?
d. $1,102.51 to be paid in two years
Explanation:
To calculate the given problem, we use the following method
We are
Rate( r) = 5% 0.5
t = 2
Amount = $1,00
The least amount the person needs to have to to 50% of winning and 50% of losing is
= $1,000 × 0.5×2
=$1,102.51