taxes and risk aversion Ralph has been offered an interesting gamble. With probability .5, Ralph will gain $500 and with probability.5 Ralph will gain $100. The gain is net of the purchase price; also, the possible outeomes are independent of any other items in Ralph' s portfolio.

a] Suppose Ralph is risk neutraI. Determine the gamble's certain equivalent.

b] Ralph remains risk neutral, but faces a eonstant marginai tax rate of 40%.

Determine the gamble's certain equivalent. Can Ralph safely ignore taxes in this cireumstance ?

e] Now suppose Ralph is risk averse, with a utility measure defined over wealth vot of -exp(-rW} and r = .001. (So Ralph's risk aversion is constant.) Repeat parts

[al and [b] above.

AppendixLO1