What is the certainty equivalent

Assignment Help Finance Basics

Reference no: EM131450936

Question: An individual has the following utility function: u(w) = w.5 where w = wealth.

a. Using expected utility, order the following prospects in terms of preference, from the most to the least preferred:

- P1(.8, 1,000, 600)

- P2(.7, 1,200, 600)

- P3(.5, 2,000, 300)

b. What is the certainty equivalent for prospect P2?

c. Without doing any calculations, would the certainty equivalent for prospect P1 be larger or smaller? Why?

Reference no: EM131450936

Questions Cloud

Save by paying off the loan with the thirtieth payment : If the credit union uses the rule of 78 for computing unearned interest, how much will she save by paying off the loan with the thirtieth payment?

Capital market-what is expected return on complete portfolio : hat is the expected return on the complete portfolio? What is the Sharpe ratio of the complete portfolio?

Closing out the position prior to expiration : Explain the advantages and disadvantages to a covered ca writer of closing out the position prior to expiration.

Compute the net profit margin and asset turnover : Compute the net profit margin for both James and Tom. Compute the asset turnover for both James and Tom.

What is the certainty equivalent : An individual has the following utility function: u(w) = w.5 where w = wealth.

What is the contribution margin and break-even dollar amount : What is the contribution margin? How many skateboards must be sold each month in order to break even? What is the break-even dollar amount?

Construct a graph of this utility function : Consider a person with the following utility function over wealth: u(w)=ew, where e is the exponential function (approximately equal to 2.7183).

Model performed much faster than current modems on market : They were able to raise this money because their test model performed much faster than current modems on the market.

Define economic rationality : When eating out, Rory prefers spaghetti over a hamburger. Last night, she had a choice of spaghetti or macaroni and cheese and decided on the spaghetti again.

User Account

All Pages