Explanation:
For a risk-neutral investor, decisions are based solely on expected value, not on risk preferences.
Calculating Expected Values:
Investment 1: Guaranteed payment = $45
Expected Value = $45
Investment 2: Equal chance (50% probability) of $100 or $0
Expected Value = (0.5 × $100) + (0.5 × $0) = $50 + $0 = $50
Analysis:
$45$50Since the investor is risk-neutral, they would prefer the investment with the higher expected value. Investment 2 has a higher expected value ($50 vs $45), so the investor should prefer Investment 2.
However, looking at the options:
Wait, let me reconsider the question more carefully. The question asks "The investor most likely:" and the correct answer appears to be C (is indifferent) based on typical CFA questions about risk-neutral investors. But mathematically, Investment 2 has higher expected value.
Actually, let me recalculate:
Investment 2: 50% chance of $100, 50% chance of $0
Expected Value = 0.5 × 100 + 0.5 × 0 = 50
Investment 1: Guaranteed $45
Since 50 > 45, a risk-neutral investor should prefer Investment 2. But the question says "most likely" and the options suggest the answer might be C. Let me check if there's a trick:
Perhaps the question is testing whether the investor would be indifferent if the expected values were equal. But they're not equal ($50 vs $45).
Actually, I think I need to reconsider: The correct answer should be B (prefers Investment 2) because:
$50 vs $45)But wait, let me double-check the calculation: Investment 2: Expected Value = (0.5 × 100) + (0.5 × 0) = 50 Investment 1: Expected Value = 45
50 > 45, so Investment 2 is better for risk-neutral investor.
Therefore, the correct answer is B.
Ultimate access to all questions.
A risk-neutral investor considers two investments:
$45.$100 or $0.The investor most likely:
A
prefers Investment 1.
B
prefers Investment 2.
C
is indifferent between Investment 1 and Investment 2.
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