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Unformatted text preview: _._M,.”.V V :. u.«.w~.w,_m.,~l : 11381786372 r ’Tes‘t #Mb) — SPRING 2005 Marks: _; 2GP (Salﬁimtes) 3 Questions, 4 Pages Aids: Calculator \ . a1 net Worth "of;$100, is facing aﬁsk’that leads to a
91 equal probability. Her utility flmctmn of, Wealth is
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You 2116 given a utility function of the form 1 We = ——c"’\“‘: A > O A
(a) Show that the above utility function can be used to Characterize a risk averse
individual?
(b) Determine if this utility function has an increasing, a decreasing, or a constant
ArrowPratt absolute risk aversion. '
(Q) Would most risk averse individual exhibit an increasing, a. decreasing, or a con—
stant Arrow—Pratt absolute risk aversion? Explain.
Repeat Part ((2) except now consider ArrowPratt relative risk aversion. An individual is exposed to a gamble X that is.1}c_rz_na,lly distributed with mean 1000 and variance 50. Using the above utility "fissiién with A = 3, coniyete the
risk premium of the gamble. ‘ ' " A
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 Spring '09
 MARYHARDY
 $100, #Mb, @ﬁrer, Siatethé Von NeumannMorgen'stém

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