Investments, tenth edition

  SOLUTION TO CONCEPT CHECK  

    A.1.       a.      U(W) 5

"W

     

U(50,000) 5

"50,000 5 223.61

     

U(150,000) 5 387.30   

     b.    E ( U ) 5 (.5  3  223.61) + (.5  3  387.30) 5 305.45  

     c.   We must find  W  

CE

  that has utility level 305.45. Therefore   

 

"W

CE

5 305.45

 W

CE

5 305.45

2

5 $93,301

   

     d.    Yes. The certainty equivalent of the risky venture is less than the expected outcome of 

$100,000.  

     e.    The certainty equivalent of the risky venture to this investor is greater than it was for the 

log utility investor considered in the text. Hence this utility function displays less risk 

aversion.                       

  

   

bod61671_ch06_168-204.indd   204

bod61671_ch06_168-204.indd   204

6/18/13   8:08 PM

6/18/13   8:08 PM

Final PDF to printer

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