Suppose John has a utility function U(z) = Inz, where > 0 is the total wealth...

 

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Suppose John has a utility function U(z) = Inz, where > 0 is the total wealth Moreover, he has a total wealth of R10000 available and considers the following investment opportunities (a) Invest all the money in a bank account At the end of the year the investment will certainly earn 15% (b) Invest all the money in the stock market. The probability is 40% that for R1 invested, he could lose 20%, and end with 80% at the end of the year Otherwise, he could earn 40% on the investment 51 How would you classify John's attitude towards risk? Justify your answer 52 Which investment option should he choose? Justify your answer 53 If his wealth available for investment increases, would he change his choice? Use the Arrow-Piatt measure to justify your answer [3] [3] [4] 54 Suppose he considers investing a proportion of his wealth in a bank account and the rest in the stock market If he is an expected utility maximiser, formulate the problem to determine how much money should be invested in the two options Do not solve the problem 14] Suppose John has a utility function U(z) = Inz, where > 0 is the total wealth Moreover, he has a total wealth of R10000 available and considers the following investment opportunities (a) Invest all the money in a bank account At the end of the year the investment will certainly earn 15% (b) Invest all the money in the stock market. The probability is 40% that for R1 invested, he could lose 20%, and end with 80% at the end of the year Otherwise, he could earn 40% on the investment 51 How would you classify John's attitude towards risk? Justify your answer 52 Which investment option should he choose? Justify your answer 53 If his wealth available for investment increases, would he change his choice? Use the Arrow-Piatt measure to justify your answer [3] [3] [4] 54 Suppose he considers investing a proportion of his wealth in a bank account and the rest in the stock market If he is an expected utility maximiser, formulate the problem to determine how much money should be invested in the two options Do not solve the problem 14]

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51 Johns attitude towards risk is classified as being riskaverse This is because his utility function is a concave function which means that he prefer... View the full answer