Multiple Choice
ABC Corp.has a bonus plan in place for its CEO,linking her pay to annual earnings.ABC will pay her $180,000 if earnings are high,$90,000 if they are normal,and $0 if they are low.Each event is estimated to have equal probability.Assume the CEO is indifferent between this bonus plan and receiving $75,000 with certainty.Which of the following is true?
A) The CEO's expected bonus is $90,000.
B) The CEO is not willing to give up $15,000 in expected bonuses in order to avoid the risky scheme.
C) $85,000 is the CEO's certainty equivalent for the current bonus plan.
D) The CEO has no clue about risk management.
Correct Answer:
Verified
Correct Answer:
Verified
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