A4.pdf - ACTSC 372 Assignment#4 Due Monday April 4th 2:00...

This preview shows page 1. Sign up to view the full content.

Image of page 1
You've reached the end of this preview.

Unformatted text preview: ACTSC 372 — Assignment #4 Due Monday April 4th — 2:00 pm in the drop boxes _—-——————_——_—_____— 1. Describe all utility functions with a (positive) constant coefficient of relative risk aversion. 2. Assume your utility function is given by u(x) = 1n(x) , and assume your current wealth is $400,000. a. How much would you pay to insure against a loss of $100,000 with probability 0.1%? b. Now assume your current wealth is $1 million. How much will you pay to insure against this same loss? c. Prove the following statement about a person with a logarithmic utility function: the amount of money (as a proportion of current wealth) a person is willing to pay to insure against a loss of 10% of current wealth with probability p is constant. What is the constant? 3. Suppose that when a decision maker is given the following two gambles, A and B she chooses A (i.e. she prefers gamble A to gamble B). 3 A: Win $50 with certainty B: Win $100 with probability 60%, and 0 with probability 40%. The same decision maker is then asked to choose between gambles C and D: C: Win $50 with 40% probability and win 0 with probability 60% D: Win $100 with 24% and 0 with probability 76%. This time she chooses D. Explain why the decision maker has violated at least one of the axioms we discussed in class. (HINT: Consider L(A,0,0.4) and L(B,0,0.4).) 4. Assume your utility function is given by u(x) = 1n(x), and assume your current wealth is $1000. How much would you pay for an investment that pays $100 or $0 with equal probability? Would you pay more or less for this investment if your current wealth were to increase? Explain. ...
View Full Document

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern