Worksheet 3 Key

# Worksheet 3 Key - Worksheet#3 Key 1 A lottery has four...

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Worksheet #3 Key 1. A lottery has four possible payoffs: \$1,000 at p= 0.05, \$500 at p = 0.15, \$100 at p = 0.3, \$0 at p = 0.5. a. Calculate the expected value of the lottery. EV = \$1,000 * 0.05 + \$500* 0.15+\$100*0.3 = \$155 b. Calculate the standard deviation of the outcome of the lottery VARIANCE = .05(1000-155) 2 +.15 (500 -155) 2 + .3(100-155) 2 + .5(0 – 155) 2 = 66475 SD = the square root of VAR = 257.83 c. What would a risk neutral person pay to play this lottery? \$155 2. Suppose state lottery tickets cost \$1.00 and the payoffs are as follows: Probability Return 0.6 \$0.00 0.25 \$1.00 0.1 \$2.00 0.05 \$10.00 a. Calculate the expected value of the lottery. EV = .6*-1 + .1 *1 + .05*9 = -.05 b. Calculate the standard deviation of the outcome of the lottery. Var = 4.74 => SD = 2.178 c. Based on the law of large numbers and the expected value, is this lottery a good proposition for the state? Yes, the average payoff is negative, which is a profit for the state. 3. An investor is concerned about a choice of a purchasing a partnership share minor league baseball team in an independent league. There are four possible outcomes for average first year profits based on the teams success.

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Worksheet 3 Key - Worksheet#3 Key 1 A lottery has four...

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