# PS5 - FIN 501 Problem Set #5 Due Thursday, October 19, 2010...

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FIN 501 Problem Set #5 Due Thursday, October 19, 2010 For all problems show your work. Please include the names of your group members and your section on your write-up. 1. Risk Loving Behavior: Consider a risk-loving decision with initial wealth w who faces a lottery that pays \$x with probability ½ and -\$x with probability ½. 1a. Draw a diagram labeling (i) w and the outcomes of the lotteries, (ii) u(w) and the expected utility of the lottery, and (iii) the certainty equivalent of the lottery. 1b. How does u(w) compare to the EU of the lottery? 1c. How does the expected value of the lottery compare to the certainty equivalent? 2. Relative and absolute risk aversion Consider a consumer with each of the following utility functions: i) ux   e x ii) ux  log x  iii) ux  x 1 2 2a. For each of the utility functions above, compute the coefficient of absolute risk aversion and the coefficient of relative risk aversion.

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## This note was uploaded on 01/18/2011 for the course FIN fin580 taught by Professor Miller during the Spring '10 term at University of Illinois, Urbana Champaign.

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PS5 - FIN 501 Problem Set #5 Due Thursday, October 19, 2010...

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