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Winnie is close to retirement. He has accumulated a lot of assets ( $ 8 0 0 , 0 0 0 ) which he has
Winnie is close to retirement. He has accumulated a lot of assets $ which he has invested
in stocks. There are three possible scenarios: His wealth could increase sharply to $ million
with a probability of his wealth could go up to $ with a probability of or it
could decrease to $ Winnie's utility over wealth is
a What is Winnie's measure of absolute risk aversion? Is the riskaversion of a $ bet greater
at a wealth of $ or at a wealth of $ What is Winnie's measure of relative risk
aversion? Is the riskaversion of a bet of of his wealth greater at a wealth of $ or
at a wealth of $
b What is the expected value of Winnie's wealth? What is Winnie's expected utility?
c If Winnie invested all his assets in government bonds instead, which always pay the same
amount, then how much would they have to pay so that Winnie is indifferent between investing
in stocks and government bonds?
d What is the risk premium that Winnie is willing to pay in order to avoid the risk of investing
in stocks?
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