10. BB has an endowment (E) which she can invest. With probability p, the investment works out well and BB ends up with E(1+r) but, with probability 1-p, BB loses all of her money. a) If BB is risk neutral, what is the lowest value of p for which she should invest? b) What is the expected value of perfect information? c) Now assume BB is risk averse with utility of money function U(m) = m12. What fraction, x, of her endowment should BR invest?
10. BB has an endowment (E) which she can invest. With probability p, the investment works out well and BB ends up with E(1+r) but, with probability 1-p, BB loses all of her money. a) If BB is risk neutral, what is the lowest value of p for which she should invest? b) What is the expected value of perfect information? c) Now assume BB is risk averse with utility of money function U(m) = m12. What fraction, x, of her endowment should BR invest?
Essentials of Economics (MindTap Course List)
8th Edition
ISBN:9781337091992
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter19: The Basic Tools Of Finance
Section: Chapter Questions
Problem 9PA
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