7-Discussion Questions

7-Discussion Questions - Lecture 7: Uncertainty (I)...

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Suggested questions and exercises (Pindyck and Rubinfeld, Ch. 5). Questions: 1, 2, 3, 5 Exercises: 1, 3, 6, 7 QUESTIONS 1. What does it mean to say that a person is risk averse? Why are some people likely to be risk averse, while others are risk lovers? 2. Why is the variance a better measure of variability than the range? 3. George has $5,000 to invest in a mutual fund. The expected return on mutual fund A is 15% and the expected return on mutual fund B is 10%. Should George pick mutual fund A or fund B? 5. Why do people often want to insure fully against uncertain situations even when the premium paid exceeds the expected value of the loss being insured against? EXERCISES 1. Consider a lottery with three possible outcomes: $125 will be received with probability .2, $100 with probability .3, and $50 with probability .5. a. What is the expected value of the lottery? b.
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7-Discussion Questions - Lecture 7: Uncertainty (I)...

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