UtilityQuestionsW07 - ConceptQuestions

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Concept Questions 1. Briefly explain why utility functions are increasing. 2. Briefly explain why concave utility functions represent risk averse investors. 3. Briefly explain the meaning of the axiom of independence of choice. 4. State and briefly explain one advantage and one disadvantage of mean-variance optimization when compared with expected utility maximization. 5. Briefly explain what is measured by the Arrow-Pratt coefficient of absolute risk aversion. 6. What is loss aversion? How is it reflected in an “S-shaped” utility function? 7. Briefly explain what is measured by the Arrow-Pratt coefficient of relative risk aversion. Problems:  7. Consider the following gambles:  Lottery A: $200 with certainty. Lottery B: $300 with probability 60% and $100 with probability 40%. Compute L(A,B;0.3). 8. Consider the following gambles: 
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This note was uploaded on 09/18/2011 for the course ACTSC 372 taught by Professor Maryhardy during the Winter '09 term at Waterloo.

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UtilityQuestionsW07 - ConceptQuestions

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