Question 1 George Propsom, a local investor in San Diego, is an expected utility maximizer with the following utility function u(x) - 1 / 1 (a) Mr. Propsom currently holds a portfolio of real estates in San Diego, worth USD1,000,000. If the local economy goes bad, the value of his investment will become USD500,000. If the local economy performs well, the value of his investment will become USD2,000,000. If the local economy is neither well nor bad, the value of his investment will remain at USD1,000,000. The probability that the local economy will go bad and go well are both 0.20 respectively. Calculate the certainty equivalent of Mr. Propsom's current holdings. [10] Suppose that Mr. Propsom can purchase insurance such that he will pay USDX to the insurer if value of his investment does not fall and he will receive a payment of USD (350,000 X) from the insurer if the value falls. What is the largest amount USDX that Mr. Propsom would be willing to pay for this insurance? [10] (b) (c) Suppose that in addition to his real estate portfolio, Mr. Propsom has safe assets that are worth of USDV, regardless of the economic condition of San Diego. Write an expression for the certainty equivalent of Mr. Propsom's asset (as a function of V) assuming that he does not buy the insurance as discussed in part (b). What will be the largest amount USDX that Mr. Propsom would be willing to pay for this insurance if V = 5000000? [10] Question 1 George Propsom, a local investor in San Diego, is an expected utility maximizer with the following utility function u(x) - 1 / 1 (a) Mr. Propsom currently holds a portfolio of real estates in San Diego, worth USD1,000,000. If the local economy goes bad, the value of his investment will become USD500,000. If the local economy performs well, the value of his investment will become USD2,000,000. If the local economy is neither well nor bad, the value of his investment will remain at USD1,000,000. The probability that the local economy will go bad and go well are both 0.20 respectively. Calculate the certainty equivalent of Mr. Propsom's current holdings. [10] Suppose that Mr. Propsom can purchase insurance such that he will pay USDX to the insurer if value of his investment does not fall and he will receive a payment of USD (350,000 X) from the insurer if the value falls. What is the largest amount USDX that Mr. Propsom would be willing to pay for this insurance? [10] (b) (c) Suppose that in addition to his real estate portfolio, Mr. Propsom has safe assets that are worth of USDV, regardless of the economic condition of San Diego. Write an expression for the certainty equivalent of Mr. Propsom's asset (as a function of V) assuming that he does not buy the insurance as discussed in part (b). What will be the largest amount USDX that Mr. Propsom would be willing to pay for this insurance if V = 5000000? [10]