Using the Utility Function in Portfolio Management, where the utility function is the constant relative risk aversion utility of wealth function U(W) = W^(gamma)/gamma, set gamma to 0.5 and consider a 50-50 bet on winning 50,000 or getting nothing. What is the certainty equivalent wealth for this bet under these assumptions? Group of answer choices 30,000 10,000 25,000 12,500

Microeconomic Theory
12th Edition
ISBN:9781337517942
Author:NICHOLSON
Publisher:NICHOLSON
Chapter7: Uncertainty
Section: Chapter Questions
Problem 7.14P
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Using the Utility Function in Portfolio Management, where the utility function is the constant relative risk aversion utility of wealth function U(W) = W^(gamma)/gamma, set gamma to 0.5 and consider a 50-50 bet on winning 50,000 or getting nothing.

What is the certainty equivalent wealth for this bet under these assumptions?

Group of answer choices

30,000

 

10,000

 

25,000

 

12,500

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