In: Economics
Devon’s utility function is represented by U(w)=2(w1/2) . Devon has just purchased a new home worth $100,000 and his home represents all of his wealth. The statistics show that in any year there is a two percent (0.02) chance that his home may burn down. If Devon’s house does burn down then the value of the scraps is $30,000.
the term risk -averse describes the investor who chooses the prevention of capital over the potential for a higher-than-average return.
In investing ,risk equals price volatility.A volatile investment can make you rich or devour your savings .A conservative investment will grow slowly and steadily over time.
Low-risk means stability .A low risk investment guarantees a reasonable if unspectacular returnwith a near -zero chance that any of the orginal investment will be lost.