Explanation

This question tests the understanding of risk preferences in portfolio management.

Key Concepts:

1. Risk Averse: An investor who prefers a certain payoff over an uncertain payoff with the same expected value. They require compensation (risk premium) for taking on risk.

2. Risk Neutral: An investor who is indifferent between a certain payoff and an uncertain payoff with the same expected value. They only care about expected value, not risk.

3. Risk Seeking: An investor who prefers an uncertain payoff over a certain payoff with the same expected value. They enjoy taking risks and may even accept lower expected returns for the thrill of uncertainty.

Analysis:

• The investor is comparing two options:
  • Option 1: Guaranteed payoff of $50 (certain outcome)
  • Option 2: Uncertain expected payoff of $50 (same expected value but with risk)
• The investor prefers the uncertain payoff over the guaranteed payoff
• This behavior demonstrates a preference for risk-taking

Conclusion: Since the investor prefers the uncertain payoff (with the same expected value of $50) over the guaranteed $50, they are exhibiting risk-seeking behavior. Risk-averse investors would prefer the guaranteed payoff, and risk-neutral investors would be indifferent between the two options.

Answer: C (risk seeking)