2. Bob's wealth is $2500. However, he faces a 50% chance of suffering a S900 loss. Heis an expected utility maximizer and his utility function isU(w) = vw ,Where w is his wealth.(a) What is Bob's cost of risk?(b) If Bob can buy insurance against his loss for a price of $500, will he buy it?(c) What is the maximum amount Bob would be willing to pay for insurance?

Bob's Wealth = 2500 Probability of loss = 50% = 0.5 Therefore , probability of no loss = 0.5…

Answered: 2. Bob's wealth is $2500. However, he…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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5. Larry, who has wealth (w) of 100, faces a 25% probability that a catastrophe will eliminate all of his wealth. Larry's utility function is u(w) = In (w + 1). We will cover insurance on 12/2 in case you want to hold off on parts (b) and (d) until then. Characterize Larry's preference over risk. Is he risk-averse, risk-loving, or risk-neutral? а. Explain. b. What is the highest premium that Larry would accept for full insurance? C. Alternatively, suppose that Larry's utility is u (w) = e". Characterize his preference for risk and explain your answer. d. Under this alternative utility function, what is the highest premium that Larry would accept for full insurance? Explain.
Suppose that Mary has a utility function U(W) W power of 0.5. Her only asset is the shares in the start-up e-com company. Next week she will learn the stock's value. She believes that it is worth $225 with the probability 1/3, $196 with the probability 1/2 and $144 with the probability 1/6. Write down the prospect and calculate the expected value and her expected utility.
A10.
16. The market consists of only two assets, A and B, with normally distributed re- turns. Asset A's returns have a mean of 18% and a standard deviation of 14% and Asset B's returns have a mean of 15% and a standard deviation of 18%. In such a scenario a risk-averse investor would always want to invest all of her money in Asset A. 17. A call option offers the purchaser limited downside loss as given by the option premium paid, combined with limited upside potential. 18. The return earned on a risk free portfolio must be equal to the risk free interest rate. 19. CAPM assumes that all investors' optimal portfolio has a fraction invested in the risk-free asset and the remaining in the minimum variance portfolio. 20. For any frontier portfolio p, except the minimum variance portfolio, there exists a unique frontier portfolio with which p has zero covariance. 21. The market portfolio of all available assets is the supply of risky assets. 22. An arbitrage opportunity is an…
3. The risk free rate is 3%. The optimal risky portfolio has an expected return of 9% and standard deviation of 20%. Answer the following questions. (a) Assume the utility function of an investor is U = E(r) − 0.5Aσ2. What is condition of A to make the investors prefer the optimal risky portfolio than the risk free asset? (b) Assume the utility function of an investor is U = E(r) − 2.5σ2. What is the expected return and standard deviation of the investor’s optimal complete portfolio?
A risk-averse consumer with $100,000 in wealth faces 0.1 probability of losing half of his wealth within the next year. a. What is the consumer's expected wealth one year from now? b. An insurance company offers our consumer full insurance against the possible loss. What premium must the consumer be charged for the insurance company to expect to break even? c. Suppose our risk-averse consumer is indifferent between getting $85,000 wealth with certainty and facing the above described uncertain situation. What is the maximum premium that the insurance company will be able to charge this consumer for its full insurance policy?
2. Consider an individual with a current wealth of $100,000 who faces the prospect of a 25% chance of losing $20,000 through theft of her car during the next year. If the person’s utility function is U(X) = ln(X), where X is wealth: a. calculate expected utility without insurance, b. calculate the actuarially fair premium for full insurance, c. calculate expected utility with full insurance at the actuarially fair premium d. calculate the maximum amount the individual would pay for full insurance.
help please answer in text form with proper workings and explanation for each and every part and steps with concept and introduction no AI no copy paste remember answer must be in proper format with all working
2
The injection molding department of a company uses an average of 30 gallons of special lubricant a day. The supply of the lubricant is replenished when the amount on hand is 170 gallons. It takes four days for an order to be delivered. Safety stock is 50 gallons, wNch provides a stockout risk of 9 percent. What amount of safety stock would provide a stockout risk of 3 percent? Assume normality.

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