Insert answers in the spaces provided.
1. Clarence Bunsen is an expected utility maximizer. His preferences among contingent
commodity bundles are represented by the expected utility function:
u(c1, c2, 1, 2) = 1c1 + 2c2.
Fenner Smith is contemplating dividing his portfolio between two assets, a risky asset that has
an expected return of 30% and a standard deviation of 10%, and a safe asset that has an
expected return of 10% and a standard de
Part I: Uncertainty
1. A risk averse individual is offered a choice between a gamble that pays $1000 with a
probability of 25% and $100 with a probability of 75%, or a payment of $325. Which
would he choose?
2. What if the p
1. Every day the Repo finance company holds a sealed-bid, second-price auction in which
it sells a repossessed automobile. There are only three bidders who bid on these cars,
Arnie, Barney, and Carny. Each of these bidders i
1. Smart Investor lives in a small country with has only one publicly traded company,
Supertech. This country had a functioning banking system and Smart Investor can
borrow money from a bank, or put money in a savings accoun
University of California, Irvine
Department of Economics
ECONOMICS OF RISK AND UNCERTAINTY
Tuesdays and Thursdays 9:30 10:50 am
Course website: https:/eee.uci.edu/15f/62170
Professor: Natalia Chernysh
1. The expected return on the market is 18%. The expected return on a stock with a beta of
1.2 is 20%. What is the risk-free rate?
2. You have a $50,000 portfolio consisting of Intel, GE and Con Edison. You put $20,000 in
1. Sidewalk Sam makes his living selling sunglasses at the boardwalk in Atlantic City. If the
sun shines Sam makes $30, and if it rains Sam only makes $10. For simplicity, we will
suppose that there are only two kinds of day