Aman, Bo, and Celia are considering an investment opportunity such that each persons final wealth (the return

Question:

Aman, Bo, and Celia are considering an investment opportunity such that each person€™s final wealth (the return net of the investment) will be

W_{1} = $ 25

thousand with probability 0.6 or

W_{2} = $ 100

thousand with probability 0.4.

a. Calculate the expected value of wealth E(W).

b. Aman€™s utility function is $U (W) = W,$ while Bo€™s is $U (W) = W^{0.5}$ and Celia€™s is $U (W) = W^{2} .$ For each person, calculate the expected utility of wealth, EU(W), the certainty equivalent wealth, CE, and the risk premium, RP.

c. Determine each person€™s attitude toward risk from his or her risk premium.