Question: Consider an investor with CRRA utility with risk aversion parameters 3 and 100 units of wealth. The investor has been convinced to invest 50 units
Consider an investor with CRRA utility with risk aversion parameters 3 and 100 units of wealth. The investor has been convinced to invest 50 units of wealth in a risky investment that is equally likely to gain 33% or lose -21% over the course of the year. The remaining 50 units are invested in a government bond yielding 5% over the course of the year. The investor now regrets making the risky investment. What is the maximum amount the investor would be willing to pay to be released from the risky investment so they can invest their entire wealth in the risk-free asset? Answer in terms of units of wealth to one decimal place.
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