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Suppose you have just inherited $14,000 and are considering options for investing the money to maximize your return If you are risk-neutral (that is neither seek out nor shy away from nisk), which of the following options should you choose to maximize your expected retur? (Hint: To calculate the expected return of an outcome, multiply the probability that an event will occur by the outcome of that event and then add them up) A. Invest the money in a corporate bond with a stated return of 5% although there is a 10% chance the company could go bankrupt. 8. Hold the money in cash and earn zero return C. Loan the money to one of your friend's roommates, Mike at an agreed-upon interest rate of 8% even though you believe there is a 7% chance that Mike will leave town without repaying you *. Put the money in an interest-bearing chequing account that earns 3%. The CDIC insures the account against bank failure Suppose you are risk-neutral and have only two choices for how to invest your money. The first option is to loan the money to one of your friend's roommates, Mike, at an agreed-upon interest rate of 8% even though you believe there is a 7% chance that Mike will leave town without repaying you. The second option is to hold the money in cash and earn zero return If you could pay your friend $200 to find out extra information about Mike that would indicate with certainty whether he will leave town without paying, you would pay the $200. Assuming that you always choose the best option based on the information available to you, your expected return if you pay your friend (accounting for the cost of paying your friend) is $ 94160" which is greater than your expected retum if you do not pay your friend. (Round your response to the nearest cent) What does this say about the value of better information regarding risk? A. Paying a small amount to improve risk assessment can be very beneficial 8. A problem created by asymmetric information can't be solved with money C. Paying a small amount to get better information regarding nisk doesn't bring benefits D. Paying a small amount of money is inefficient in cases of moral hazard

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