Option A:
Price today: $1000
One year from today Terry will receive one of the following payments $5000 with a probability of 10% $1200 with a probability of 80% $0 with a probability of 10%Option B:
Price today: $1000
One year from today Terry will receive one of the following payments $2000 with a probability of 40% $1000 with a probability of 50% $0 with a probability of 10%Option C:
Price today: $1000
One year from today Terry will receive one of the following payments $1200 with a probability of 90% $1000 with a probability of 8% $0 with a probability of 2%a. What is the expected value (payment) of each of the options at the end of the year?b. Which of the options has the highest risk? Why?c. If Terry is a risk neutral inventor which option will be selected?d. How would your answer change if Terry is a risk averse investor?