Suppose you are considering investing in a pharmaceutical co

Suppose you are considering investing in a pharmaceutical company that is developing a new treatment for an incurable disease. If it is successful, the company’s stock price will increase from $30/share to $40/share. If the new treatment fails, the stock price will remain at $30/share. The probability of success is .10; the probability of failure is .90. A __________________ person would buy the stock at $30 per share.

a. risk neutral

b. risk inclined

c. risk averse

d. risk loving

Solution

c. risk averse

as there is 100% cetranity to get at least 30.