Which investor a will avoid this investment

Reference no: EM133291090

Investor A whose utility function is U(x) = x1/3, x > 0 and initial wealth is $7, is offered an investment that generates a random payoff of $X, where
P(X = 20) = p, P(X = 1) = p and P(X = -6) = 1 -2p.

(1) Find the range of p for which investor A will avoid this investment.
Investor B has utility function V(x) = U(x) + ax + b where a > 0 and b ∈R. Let RA and RB be the absolute risk aversion function of investor A and B respectively

(2) Show that RA is a decreasing function.

(3) By finding and simplifying an expression for RA -RB, prove that investor A is globally more risk averse than investor B.

Reference no: EM133291090

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