2. (Measures of Risk Aversion in EUT) In class we discussed the Arrow-Pratt coefficientof absolute risk aversion:r(x):Another measure of risk aversion that is often used is the Arrow-Pratt coefficient ofrelative risk aversion:q(x) =u₁(x) = 1- ep• U₂(x) =21-P-11-p• Uz(x) = ln(x)==• u₁(x) = ax• u₁(x) = x-ax²u"(x)u'(x)Both measures capture different aspects of risk aversion. One way to see the differenceis to consider an agent who has a budget to allocate to a portfolio of a safe asset (abond) and a risky asset (a stock). The higher r(x), the more dollars the agent willallocate to the bond. The higher q(z), the bigger the share of the agent's portfolio thatwill be allocated to the bond.1Tu" (x)u'(x)The questions below refer to the following utility functions, which are often used inapplications. Here is the agent's income or wealth, and p and a are parameters:(a) Calculate r(x) and g(x) for each of the above utility functions.(b) Are r(r) and q(z) increasing, decreasing, or constant with respect to z ineach of the above cases?

Absolute Risk Aversion refers to the level of risk an individual can accept.Relative Risk Aversion…

2. (Measures of Risk Aversion in EUT) In class we discussed the Arrow-Pratt coefficient of absolute risk aversion: u"(x) u'(x) r(x) = Another measure of risk aversion that is often used is the Arrow-Pratt coefficient of relative risk aversion: xu" (x) u'(x) q(x) = Both measures capture different aspects of risk aversion. One way to see the difference is to consider an agent who has a budget to allocate to a portfolio of a safe asset (a bond) and a risky asset (a stock). The higher r(r), the more dollars the agent will allocate to the bond. The higher q(z), the bigger the share of the agent's portfolio that will be allocated to the bond.

2. (Measures of Risk Aversion in EUT) In class we discussed the Arrow-Pratt coefficient of absolute risk aversion: u"(x) u'(x) r(x) = Another measure of risk aversion that is often used is the Arrow-Pratt coefficient of relative risk aversion: xu" (x) u'(x) q(x) = Both measures capture different aspects of risk aversion. One way to see the difference is to consider an agent who has a budget to allocate to a portfolio of a safe asset (a bond) and a risky asset (a stock). The higher r(r), the more dollars the agent will allocate to the bond. The higher q(z), the bigger the share of the agent's portfolio that will be allocated to the bond.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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