Question: 1. *2.7 Hugo has a concave utility function of U(W) = W0.5. His only asset is shares in an internet start-up com pany. Tomorrow he

1. *2.7 Hugo has a concave utility function of U(W) = W0.5.

His only asset is shares in an internet start-up com pany. Tomorrow he will learn the stock’s value. He believes that it is worth $144 with probability 2 3 and

$225 with probability 1 3. What is his expected utility?

What risk premium would he pay to avoid bearing this risk? (Hint: See Solved Problem 16.3.) M

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