Question: Mr. Smith has a utility function given by U(W) = W Ln(W), where W stands for the wealth (W>0) and Ln stands for natural logarithm.

Mr. Smith has a utility function given by U(W) = W Ln(W), where W stands for the wealth (W>0) and Ln stands for natural logarithm.

  1. What condition about wealth must be met to achieve positive marginal utility?
  2. Compute the absolute risk aversion (ARA) and relative risk aversion (RRA) of Mr. Smith as functions of his wealth.
  3. Assume there are two risky assets on the marketplace. The first asset has an expected return of 15% and a risk of 3%. The second asset has an expected return of 25% and 20% risk. Which asset is Mr. Smith more likely to invest in?

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