Kedran is indifferent between option A, which gives her $10,000 for sure, and option B, which gives her $5,000 with probability 0.4 or $15,000 with probability 0.6. Kedran's cost of risk for option B is
A) zero.
B) $1,000.
C) $5,000.
D) $10,000.

Question

Quizplus · Accepted Answer

Kedran's expected value for option B is (0.4 * $5,000) + (0.6 * $15,000) = $10,000. Since she is indifferent between option A and option B, her cost of risk for option B is zero.

Kedran Is Indifferent Between Option A, Which Gives Her $10,000