A decision maker’s assessed risk tolerance is $1,210. Assume that this individual’s preferences can be modeled with an exponential utility function.
a. Find U ($1,000), U($800), U($0), and U( − $1,250).
b. Find the EU for an investment that has the following payoff distribution:
P ($1,000) = 0.33
P ($800) = 0.21
P ($0) = 0.33
P (– $1,250) = 0.13
c. Find the exact CE for the investment and the risk premium.
d. Find the approximate CE using the expected value and variance of the payoffs.
e. Another investment possibility has expected value $2,400 and standard deviation $300. Find the approximate CE for this investment.