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IAI Actuarial Core Principles · Business Management · Decision-making process, attitude to risk and competition

Meera, a finance manager at an Indian manufacturing firm, is offered a choice between a certain gain of ₹50 lakh and a gamble giving a 50% chance of ₹100 lakh and a 50% chance of nothing. She picks the certain ₹50 lakh. Which description of her attitude to risk is most appropriate?

Meera is risk-averse. The gamble and the certain payment have the same expected value of ₹50 lakh, so a clear preference for certainty over uncertain outcomes of equal average shows she dislikes risk. A risk-neutral person would be indifferent between them.

  1. ARisk-averse, because she prefers the certain amount to a gamble of equal expected valueCorrect
  2. BRisk-neutral, because the expected values of both choices are equal
  3. CRisk-seeking, because she avoids losing the chance of ₹100 lakh
  4. DRisk-averse, because the gamble has a lower expected value than the certain amount
  5. Risk-neutral, because she ignores the variability of outcomes

Explanation

Both options have an expected value of ₹50 lakh. Choosing the certain amount over a gamble with the same expected value shows risk aversion. Option 1 is wrong because a risk-neutral person would be indifferent. Option 3 is wrong because the expected values are equal, not lower.

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