This preview shows page 1. Sign up to view the full content.
Econ 6202, Fall 2009
Dmitry Shapiro
Problem Set 4
Due Tuesday October 6, 2009
1. An investor’s initial wealth is $ 30,000. The riskless asset has a rate of return equal to 1.05. The
rate of return of the risky asset is 1.03 with probability
33
100
, and 1.06 with probability
67
100
. The von
NeumannMorgenstern utility function is
u
(
x
) = ln(
x
). Find the amount of wealth that the investor
puts into the risky asset.
2. An individual is seen to place an evenmoney $100,000 bet on the Lakers to win the NBA championship.
If that individual has a ln(
·
) von NeumannMorgenstern utility function and his current wealth is
$1,000,000, what is the minimum probability he must assign to the Lakers winning the championship?
3. An individual has wealth
W
. Her von NeumannMorgenstern utility function over nonnegative levels
of wealth is
u
(
y
) =
y
ρ
,
where 0
< ρ <
1. The individual is oﬀered the following bet. If she pays
x
,
with probability 1/2 she receives nothing and with probability 1/2 she receives
This is the end of the preview. Sign up
to
access the rest of the document.
This note was uploaded on 10/20/2010 for the course ECON 6202 taught by Professor Shapiro during the Fall '09 term at UNC Charlotte.
 Fall '09
 SHAPIRO

Click to edit the document details