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 a What is the expected value of this investment? marks b What is the expected utility of this investment? marks c Is this investor riskaverse? Show why this is the case. marks d Explain what the certainty equivalent is and compute it for the above risky gamble for the investor. marks e What is the level of the risk premium if investor is asked to pay for this investment? marks f Define absolute risk aversion ARA Does this investors utility function display increasing ARA? 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? marks h What do the slopes of the indifference curves of the type of investor as the one in this question depend on marks
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