SCENARIO 20-2
The following payoff matrix is given in dollars.

Suppose the probability of Event 1 is 0.5 and Event 2 is 0.5.
-Referring to Scenario 20-2,what is the action with the preferable return to risk ratio?
A)Action A
B)Action B
C)Either Action A or Action B
D)It cannot be determined.

Question

SCENARIO 20-2
The following payoff matrix is given in dollars.

Suppose the probability of Event 1 is 0.5 and Event 2 is 0.5.
-Referring to Scenario 20-2,what is the action with the preferable return to risk ratio?
A)Action A 
B)Action B 
C)Either Action A or Action B 
D)It cannot be determined.

Quizplus · Accepted Answer

To determine the preferable return to risk ratio, we need to calculate the expected payoff for each option by multiplying each payoff by its probability and then adding the products. 
For Action A:
(0.5)(-10)+(0.5)(50) = 20
For Action B:
(0.5)(-20)+(0.5)(60) = 20
Both options have the same expected payoff of $20. 
However, the risk for Action A is higher because the negative payoff is larger than the negative payoff for Action B. Therefore, Action B has the preferable return to risk ratio.

SCENARIO 20-2 The Following Payoff Matrix Is Given in Dollars