Suppose you are a hedge fund manager and you have two customers A and B. You have a good investment plan whose returns from $100,000 can be $130,000 with 20% chance; $110,000 with 70% chance; and $20,000 with 10% chance (which is a disaster case). You know your customers have the same CRRA utility U(W) = [W1^(1-a)]/(1-a) but different degrees of risk aversion: a = 0:1 for Customer A and a = 0:2 for Customer B (Customer B is more risk cautious than Customer A). You are risk-neutral, by the way.

How much investment fees will you ask for Customers A and B, respectively?

Answer rating: 100% (QA)

one possible approach is to calculate the expected return for each customer and ... View the full answer