ECON 203 Study Guide - Quiz Guide: Risk Aversion, Flood Insurance, Utility
23 Mar 2019
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Coverage: chapter 7 firms, investors and capital markets. Both are confronted with the following gamble: win. ,000 with the probability of 65% or lose ,000 with a probability of 35%. Part ii: short question: risk-aversion, risk-neutrality and risk-loving: Suppose you work as a mutual funds manager for a commercial bank and a new customer has just walked through the door. She is interested in buying mutual funds for the first time. Your first task is to find out her degree of risk tolerance before you can recommend to her the most suitable funds (conservative funds, balanced growth funds or aggressive growth funds). Find the expected value (ev) or return of the game. Ans: the expected value (ev) of the game is 0. 5*+0. 5*0=. Suppose she can have one of the following utility functions: (a) u=x0. 5 (b) u=x (c) u=x2. Find the utility value for each utility function.
