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Supposethatyourinitialwealthis100andyouconsiderariskyinvestment(likebuyingastockoracompany).Iftheinvestmentsucceeds,yourfinalwealthwillbe200.Iftheinvestmentfails,yourfinalwealthwillbe50.Bothofthesepossibilitieshappenwithprobability1 / 2.Ifyoudecidetonotinvest,yourfinalwealthwillbeequal toyourinitial wealth, i.e.,100. (5points) Wouldyou investifyou wererisk-neutral? (5points) Wouldyou investifyou wererisk-loving? (5points) Wouldyou investifyou wererisk-averse? (d)(10points) Nowsuppose thatyourutility of final wealth is
Supposethatyourinitialwealthis100andyouconsiderariskyinvestment(likebuyingastockoracompany).Iftheinvestmentsucceeds,yourfinalwealthwillbe200.Iftheinvestmentfails,yourfinalwealthwillbe50.Bothofthesepossibilitieshappenwithprobability1/2.Ifyoudecidetonotinvest,yourfinalwealthwillbeequal toyourinitial wealth, i.e.,100.
- (5points)Wouldyou investifyou wererisk-neutral?
- (5points)Wouldyou investifyou wererisk-loving?
- (5points)Wouldyou investifyou wererisk-averse?
(d)(10points) Nowsuppose thatyourutility of final wealth is givenbyu(w) = w. What sort of risk attitude does this utility function imply?Wouldyouinvest?
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