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    Question

    Suppose X has income of Rs.500. He wants to maximise his

    expected benefit Z1/2 where Z is his money earned. He has two options, 1. Do not invest 2. Investment full amount in company A with payoff of 1500 with 50% probability and Rs.0 with 50% probability. What is the maximum expected benefit out of the two options?
    A 19.36 Correct Answer Incorrect Answer
    B 22.36 Correct Answer Incorrect Answer
    C 38.73 Correct Answer Incorrect Answer
    D 44.72 Correct Answer Incorrect Answer

    Solution

    Expected benefits = Z1/2 When he does not invest, EB= (500)1/2 = 22.36 When he does invest in A, EB = ½ (1500)1/2 + ½ (0)1/2 = ½ (38.73) = 19.36 So, Max EB = 22.36

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