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Mr. Smith has a utility function given by U(W) = W Ln(W), where W stands for the wealth (W>0) and Ln stands for natural logarithm.
Mr. Smith has a utility function given by U(W) = W Ln(W), where W stands for the wealth (W>0) and Ln stands for natural logarithm.
- What condition about wealth must be met to achieve positive marginal utility?
- Compute the absolute risk aversion (ARA) and relative risk aversion (RRA) of Mr. Smith as functions of his wealth.
- Assume there are two risky assets on the marketplace. The first asset has an expected return of 15% and a risk of 3%. The second asset has an expected return of 25% and 20% risk. Which asset is Mr. Smith more likely to invest in?
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