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Consider a person with the following utility function over wealth: u(w) = ew, where e is the exponential function (approximately equal to 2.7183) and w = wealth in hundreds of thousands of dollars. Suppose that this person has a 40% chance of wealth of $100,000 and a 60% chance of wealth of $2,000,000 as summarized by P(0.40, $100,000, $2,000,000).

a. What is the expected value of wealth?

b. Construct a graph of this utility function (recall your excel?).

c. Is this person risk averse, risk neutral, or a risk seeker?

d. What is this person’s certainty equivalent for the prospect?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92257072

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