For higher risk tolerance investors, it typically holds that Select one: Otheir utility indifference curve touches a higher point on the capital allocation line Otheir utility indifference curve touches the efficient frontier at a minimum variance portfolio Otheir utility indifference curve touches a lower point on the capital allocation line Othey are more risk-averse than others their utility indifference curve touches the efficient frontier at the market portfolio
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- The Constant Relative Risk Aversion (CRRA) utility function is a widely used specifica- tion of preferences in economics that captures risk aversion and intertemporal consump- tion smoothing. The CRRA utility function has the desirable property that the degree of risk aversion is constant and independent of the level of consumption. This means that as a household's consumption grows, its willingness to take risks remains the same. The coefficient of relative risk aversion (σ) measures the extent to which households are risk- averse and prefer a smooth consumption path over time. A higher value of σ indicates a greater degree of risk aversion and a stronger preference for consumption smoothing. Consider a two-period endowment economy with a large number of identical house- holds. Each household has the following lifetime utility function: U(j) = C+(j) 1-0 - 1 1-σ +ẞ C++1(j) 1-0 - 1 1-σ where C₁(j) and C++1(j) are consumption in periods t and t + 1 for household j, re- spectively, ẞ is…ASAPExercise 3.17 (competitive product market interac- tions). There is a mass 1 of identical entrepreneurs with the variable-investment technology described in Section 3.4. The representative entrepreneur has wealth A, is risk neutral, and is protected by limited liability. Denote the average investment by I and the indi- vidual investment i (in equilibrium i = I by symme- try but we need to distinguish the two in a first step in order to compute the competitive equilibrium). A project produces Ri units of goods when successful and 0 when it fails. The probability of success is pH in the case of good behavior (the entrepreneur receives no private benefit) and pL = pH − ∆p in the case of misbehavior (the entrepreneur then receives private benefit Bi). Assume that it is optimal to induce the entrepreneur to behave. The market price of output is P = P(Q), with P' 0, where Q is aggregate production (with P(Q) tend- R ≡ RS…
- Jason Stilton is the chief executive officer of RightLiving a company that buys life insurance policies at a discount from terminally ill persons and sells the policies to investors for 85% of the value of the future benefit. The patients recieve the cash to use for medical and other expenses and the investors are guaranteed a positive return on thier investment. The diffreance between the purchace and sale prices is the RightLivinf Profit. Stilton is aware that some sick patients may obtain insurance policies through fraud (Not revealing thier illness on the insurance application). An insurance company that discovers such will cancel the policy and refuse to pay. Stilton beleives that most of the policies he has purchased are legitimate, but he knows some are probably not. Question Using IDDR approch, discuss the decision process Stilton should use in deciding whether to disclose the risk of fraudulent policies to potential investors.he person who requires high return regardles bf nsk s called (a There 1s no difference between return d riok preference. Drish averse O risk neutral (indifferent) (ay risk seekingAfter ten years as a general auto mechanic in a local garage, Joe decides he is tired of working for others, especially since business is typically slow and he works partially on commission. So, he decides to open his own garage. After estimating the cash flows for his new garage, he finds a large, positive NPV. Which of the following is most likely true about his analysis? Select one: O a. The discount rate he used must be too high. O b. Unless he can find a true source of value in his new venture, he probably made a mistake in estimating his cash flows. He has likely been overly optimistic about the future and has underestimated future cash flows. O c. O d. His estimates of initial outlays must be off. O e. His analysis is probably correct provided there is adequate competition in the auto repair business.
- Eunice, the industry analyst of H&M, wants to determine the propensity of Major Clothingcompanies toward risk. She was able to determine the utility distribution of H&M, Uniqloand Dickies. For H&M, If the expected payoff of a venture is a loss of 125,000, the utilityvalue is 0.00, if a loss of 75,000, the utility value is .2, if breakeven, the utility value is .5,if gain of 75,000 .8 and if gain of 125,000 utility value is 1. For Uniqlo, if loss of 125,000utility value is 0, if loss of 75,000 utility value is .1, breakeven is .4, if a gain of 75,000,utility value is .7 and if gain of 125,000 utility value is 1. For Dickies, if loss of 125,000,utility value is 0, if loss of 75,000, utility value is .3 breakeven is .6, if gain of 75,000, utilityvalue is .9 and gain of 125,000, utility value is 1. What is the propensity to risk of the threeinternet companies? Explain your graph.A firm plans to expand its product line and faces a dilemma whether to build a small or largefacility to produce new products. If it builds a small facility and demand is low, the NPV afterdeducting for building costs will be four hundred thousand pesos. If demand is high, the firm caneither maintain the small facility or expand it. Expansion would have an NPV of four hundredfifty pesos while maintaining the small facility would have an NPV of fifty thousand pesos. If alarge facility is built and demand is high, the estimated NPV would be eight hundred thousandpesos. If demand turns out to be low, the NPV would be a loss of ten thousand. The probabilitythat the demand is high is estimated to be sixty percent.a. Analyze using a decision tree.b. Compute for EVPI.c. Determine the range over which each alternative would be best in terms of the valuewhen demand is low.4) Consider investors with preferences represented by the utility function U = E(r) – Ao². (a) Draw the indifference curve representing a utility level of 10% for an in- vestor with a risk aversion parameter A = 3 in expected return-standard deviation space. (b) In the same graph, draw the indifference curve representing a utility level of 15% for an investor with a risk aversion parameter A = 3. (c) In the same graph, draw the indifference curve representing a utility level of 10% for an investor with a risk aversion parameter A = 5.
- Suppose there is a 50–50 chance that a risk-averse individual with a current wealth of $20,000 will contract a debilitating disease and suffer a loss of $10,000. a. Calculate the cost of actuarially fair insurance in this situation and use a utility-of-wealth graph (such as shown in Figure 7.1) to show that the individual will prefer fair insurance against this loss to accepting the gamble uninsured. b. Suppose two types of insurance policies were available: (1) a fair policy covering the complete loss; and (2) a fair policy covering only half of any loss incurred. Calculate the cost of the second type of policy and show that the individual will generally regard it as inferior to the first. Reference: Figure 7.1QUESTION 4 Mrs. Obaatanpa has a wealth of Ghe 3,500 for one year. There is a 35% probability that she will get sick and she estimates her loss from the illness to be Gh 1,600. Her utility function is given as U(Y) = VY, where Y is the amount of wealth she has. a) Comment on her utility function. Is she risk-neutral? b) Estimate the risk that she faces and explain. c) What is her expected utility? d) Suppose that she can buy an insurance policy that will cover the entire loss, what is the maximum premium she would be willing to pay?Q1. A farmer believes there is a 50-50 chance that the next growing season will be abnormally rainy. His expected utility function has the form Expected utility = 0.5lnYNR + 0.5lnYR Where and represent the farmers income in the state of ‘normal rain’ and ‘rainy’ respectively. Suppose the farmer must choose between two crops that promise the following income prospects Crop YNR YR Wheat $83,000 $10,000 Maize $83,000 $15000 What mix of wheat and maize would provide maximum expected utility to this farmer?