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- Define the term risk aversion?In the field of financial management, it has been observed that there is a trade-off between the rate of return that one earns on investments and the amount of risk that one must bear to earn that return. a) Draw a set of indifference curves between risk and return for a person that is risk-averse (a person that does not like risk).Question 3: Jane has utility function over her net income U(Y)=Y2 a. What are Jane's preferences towards risk? Is she risk averse, risk neutral or risk loving? [Briefly explain your answer] b. Jane drives to work every day and she spends a lot of money on parking meters. She is considering of cheating and not paying for the parking. However, she knows that there is a 1/4 probability of being caught on a given day if she cheats, and that the cost of the ticket is $36. Her daily income is $100. What is the maximum amount of she will be willing to pay for one day parking? c. Paul also faces the same dilemma every single day. However, he has a utility function U(Y)-Y. His daily income is also $100. What is Paul's preference towards risk? Is he risk averse, risk neutral or risk loving? d. If the price of one day parking is $9.25, will Paul cheat or pay the parking meter? Will Jane cheat or pay the parking meter?
- Can you explain how Constant Relative Risk Aversion utility function should be understood and how it works mathematicallyPlease draw a utility function that exhibits risk-loving behavior for small gambles (low values)and risk-averse behavior for larger gambles (high value).8 Hope is offered the choice between either taking $10 or flipping a coin. If the coin shows heads, Hope gets $15, but if the coin comes up tails, then Hope gets $8. After considering the possible outcomes, Hope takes the $10 instead of flipping the coin. Hope is a individual. risk averse risqué risk loving risk neutral I choose to use one of my three skips on this question.
- Draw a utility function over income u( I) that describes a man who is a risk lover when his income is low but risk averse when his income is high. Can you explain why such a utility function might reasonably describe a person’s preferences?Explain the relationship between U" >0 and risk aversion.You have a car valued at Gh60, 000. You estimate that there is a 0.1 percent chance that your car will be stolen. An insurance company offers you insurance against this eventuality for a premium of Gh800. If you are risk-neutral, should you buy insurance?