Question
As in the previous exercise, consider an initial wealth of 10 and the lottery X [-6 or +6, both with probability 0.5]. Assume now that
As in the previous exercise, consider an initial wealth of 10 and the lottery X [-6 or +6, both with probability 0.5].
Assume now that the utility is:
= w for w <=10
u= 1/2 W + 5 for w > 10
a. Draw the utility function. Is it globally concave?
b. Compute the certainty equivalent and the risk premium attached to X.
c. Can you apply the Arrow-Pratt approximation? Why?
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Principles Of Financial Accounting
Authors: John J Wild, Ken W Shaw, Barbara Chiappetta
22nd Edition
0077632893, 9780077632892
