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Q5 (10 marks). Suppose that we are interested in explaining the equity pre- mium puzzle using prospect theory. Suppose also that the probability weighting function
Q5 (10 marks). Suppose that we are interested in explaining the equity pre- mium puzzle using prospect theory. Suppose also that the probability weighting function is linear and the utility function under prospect theory is given by .0.88 if 220 v (T) - - 1.0 (-2)0.88 if 250 Evaluate the following statement. "Under the assumptions given in the question we can explain the equity premium puzzle."
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