Assume one individual has the utility function expressed by U(W)=lnW; her current wealth W 0 =…
Assume one individual has the utility function expressed by
U(W)=lnW; her current wealth W0 = $120; she
faces a potential loss L. L can be either $20
(with the probability of 20%) and $100 (with the probability of
20%).
U(W)=lnW; her current wealth W0 = $120; she
faces a potential loss L. L can be either $20
(with the probability of 20%) and $100 (with the probability of
20%).
- Is she a risk-averse person?
- What is her Arrow-Pratt measure of absolute risk aversion? Does
she have CRRA? - What is the actuarially fair insurance price, if she is going
to purchase an insurance policy that fully covers the loss? - What is her expected value of final wealth?
- What is the expected utility of final wealth if she does not
purchase insurance? - What is her certainty equivalent wealth?
- What is the maximum premium of insurance she is willing to pay
to fully cover the loss?
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