Suppose preferences can be represented by PT with weighting functions p (pc + (1 - p)c)/c...

 

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Suppose preferences can be represented by PT with weighting functions pº (pc + (1 - p)c)¹/c pd (pd + (1 - p)d)1/d and value function. w+ (p) = w (p) v(x) = = = [a", 1-X (-x) ⁰¹, x ≥ 0 x < 0. consider the prospect (0.01, 80; 0.35, 60; 0.35, 30; 0.29, -30). (a) Assume PT with c = 0.61, d = 0.69, 0 = 0 = 0.88 and A = 2.25. Calculate the risk premium of the prospect. (b) Assume EU. That is, probability weighting is linear (c= d =1). Further, 00' 0.88 and X = 1. Calculate the risk premium of the prospect. = (c) Assume RDEU with linear utility. That is, 0 = 0 = 1, c = 0.61 with one weighting function w, and λ = 1. Calculate the risk premium of the prospect. (d) Assume PT with linear utility and no loss aversion. That is, 0 = 0 = 1, and X 1. For comparison with part c, we take cd = 0.61. Calculate the risk premium of the prospect. = (e) Assume PT with only loss aversion effective; i.e., 0 = 0 = 1, c= d = 1, and A = 2.25. Calculate the risk premium of the prospect. Suppose preferences can be represented by PT with weighting functions pº (pc + (1 - p)c)¹/c pd (pd + (1 - p)d)1/d and value function. w+ (p) = w (p) v(x) = = = [a", 1-X (-x) ⁰¹, x ≥ 0 x < 0. consider the prospect (0.01, 80; 0.35, 60; 0.35, 30; 0.29, -30). (a) Assume PT with c = 0.61, d = 0.69, 0 = 0 = 0.88 and A = 2.25. Calculate the risk premium of the prospect. (b) Assume EU. That is, probability weighting is linear (c= d =1). Further, 00' 0.88 and X = 1. Calculate the risk premium of the prospect. = (c) Assume RDEU with linear utility. That is, 0 = 0 = 1, c = 0.61 with one weighting function w, and λ = 1. Calculate the risk premium of the prospect. (d) Assume PT with linear utility and no loss aversion. That is, 0 = 0 = 1, and X 1. For comparison with part c, we take cd = 0.61. Calculate the risk premium of the prospect. = (e) Assume PT with only loss aversion effective; i.e., 0 = 0 = 1, c= d = 1, and A = 2.25. Calculate the risk premium of the prospect.

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The question presented refers to different methods of evaluating risky prospects according to Prospect Theory PT Expected Utility Theory EU and RankDependent Expected Utility RDEU taking into account ... View the full answer