Clancy has $1,800.He plans to bet on a boxing match between Sullivan and Flanagan.He finds that he can buy coupons for $9 that will pay off $10 each if Sullivan wins.He also finds in another store some coupons that will pay off $10 if Flanagan wins.The Flanagan tickets cost $1 each.Clancy believes that the two fighters each have a probability of 1/2 of winning.Clancy is a risk averter who tries to maximize the expected value of the natural log of his wealth.Which of the following strategies would maximize his expected utility?
A)Don't gamble at all.
B)Buy 100 Sullivan tickets and 900 Flanagan tickets.
C)Buy exactly as many Flanagan tickets as Sullivan tickets.
D)Buy 50 Sullivan tickets and 450 Flanagan tickets.
E)Buy 50 Sullivan tickets and 900 Flanagan tickets.

Question

Quizplus · Accepted Answer

Buying 100 Sullivan tickets and 900 Flanagan tickets maximizes the expected value of the natural log of his wealth because it gives him the highest expected return for the amount of risk he is taking.

Clancy Has $1,800