1. a. Two investors, A and B, are
evaluating the same investment opportunity, which has an expected
value of £100. The utility functions of A and B are ln(x) and
x2, respectively. Which investor has a certainty
equivalent higher than 100? Which investor requires the higher risk
premium?
b. (i) Describe suitable measures of risk for
‘loss-aversion’ and ‘risk aversion’.
(ii) Concisely define the term ‘risk neutral’
with respect to a utility function u
(w), where w is
the realisation...