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Consider a stock that has a 25% return with probability 57%, and a return of -12% otherwise. Assume that your initial wealth level is 10,
Consider a stock that has a 25% return with probability 57%, and a return of -12% otherwise. Assume that your initial wealth level is 10, and that you invest that entire wealth in the stock. The utility you derive from your terminal wealth is given by the function . u(x) = x .
Thus, the certainty equivalent of your terminal wealth is (rounded to four digits)
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