Consider a person with the following utility function over wealth: u(w) = e w , where e
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Consider a person with the following utility function over wealth: u(w) = ew, where e is the exponential function (approximately equal to 2.7183) and w = wealth in hundreds of thousands of dollars. Suppose that this person has a 40% chance of wealth of $100,000 and a 60% chance of wealth of $2,000,000 as summarized by P(0.40, $100,000, $2,000,000).
a. What is the expected value of wealth?
b. Is this person risk averse, risk neutral, or a risk seeker?
c. What is this person’s certainty equivalent for the prospect?
Related Book For
Behavioral Finance Psychology Decision-Making and Markets
ISBN: 978-0324661170
1st edition
Authors: Lucy Ackert
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