Assume an investor's preferences can be described by a utility function which can be expressed in...
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Assume an investor's preferences can be described by a utility function which can be expressed in terms of wealth as U(W) = 20W -.5W?. The investor is considering 3 investments with the following uncertain future outcomes and probabilities of occurrence i. 1/3 chance of 6, 1/3 chance of 7 and 1/3 chance of 8 ii. 1/4 chance of 4, 1/2 chance of 7 and 1/4 chance of 10 iii. 1/5 chance of 1, 3/5 chance of 6 and 1/5 chance of 16 1. Is this a "well-behaved" utility function? Explain why or why not...4 marks 2. What is the expected outcome for each investment...4 marks 3. What investment would be preferred by the investor ..4 marks Assume an investor's preferences can be described by a utility function which can be expressed in terms of wealth as U(W) = 20W -.5W?. The investor is considering 3 investments with the following uncertain future outcomes and probabilities of occurrence i. 1/3 chance of 6, 1/3 chance of 7 and 1/3 chance of 8 ii. 1/4 chance of 4, 1/2 chance of 7 and 1/4 chance of 10 iii. 1/5 chance of 1, 3/5 chance of 6 and 1/5 chance of 16 1. Is this a "well-behaved" utility function? Explain why or why not...4 marks 2. What is the expected outcome for each investment...4 marks 3. What investment would be preferred by the investor ..4 marks
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Answer 1 The Utility function UW20W05W2 is a Well behaved Utility functio... View the full answer
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