*2.6 Max has a concave utility function of U(W) = W0.5.

His only asset is shares in an Internet start-up company.

He will learn the stock’s value tomorrow. He believes that it is worth $625 with a 60% probability and $225 with a 40% probability. What is his expected utility? What risk premium would he pay to avoid bearing this risk? (Hint: See Q&A 14.2 and the discussion of the risk premium in Figure 14.2.)