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q81 mcq page no 23
isnt the answers to mcq be identify all possible outcome and probabilities and assume decision will often be repeated
but I feel the answer given is wrong its given 1 and 2 :assume the investor is risk neutral
No the answer is correct.
As the answer says, using EV is more appropriate if the decision is repeated, but it can be used as an approach even when the decision is a one-off – even though it is a big limitation.
As far as choice 2 is concerned, EV certainly does assume that investors are risk neutral.
It is the wording of the question that makes the difference – the question simply speaks of calculating and using EV’s, not whether it is a perfect way of making decisions or not.
If you watch my lectures on risk and uncertainty, then I do explain why there is still a logic in applying it to one-off decisions (if you are risk-neutral).
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