Using the formulas for ARA and RRA (a) Show that exponential utility: (U(x)=1-e^{-c x}) for some (c>0),
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Using the formulas for ARA and RRA
(a) Show that exponential utility: \(U(x)=1-e^{-c x}\) for some \(c>0\), has constant ARA (CARA).
(b) For power utility: \(U(x)=\left(x^{1-\alpha}-1ight) /(1-\alpha)\) for \(\alpha eq 1\)
i. Show that power utility is concave (risk averse) when \(\alpha>0\) and convex (risk seeking) when \(\alpha<0\).
ii. What type of behavior is modeled when \(\alpha=0\) ?
iii. Show that power utility has constant RRA (CRRA).
iv. Using L'Hôpital's rule, show that power utility reduces to \(\log\) utility, \(U(x)=\ln (x)\), when \(\alpha=1\).
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Related Book For
Mathematical Techniques In Finance An Introduction Wiley Finance
ISBN: 9781119838401
1st Edition
Authors: Amir Sadr
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