Question: An investor has the following utility function: = ln ( ) He is facing the following risky investment: Probability Payoff ( A ) 0 .

An investor has the following utility function: = ln() He is facing the following risky investment: Probability Payoff (A)0.252200.75110 a. What is the expected value of this investment? (2 marks) b. What is the expected utility of this investment? (2 marks) c. Is this investor risk-averse? Show why this is the case. (4 marks) d. Explain what the certainty equivalent is and compute it for the above risky gamble for the investor. (4 marks) e. What is the level of the risk premium if investor is asked to pay 137.50 for this investment? (2 marks) f. Define absolute risk aversion (ARA). Does this investors utility function display increasing ARA? (4 marks) g. Find the relative risk aversion (RRA) of this utility function. Is it constant, increasing or decreasing? Is the RRA displaying rational economic behaviour? (4 marks) h. What do the slopes of the indifference curves of the type of investor as the one in this question depend on?(3 marks)

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