Tim has a concave utility function u(w) = w ‐ w²/2, where w∈[0,1] His only major...

Tim has a concave utility function u(w) = w ‐ w²/2, where w∈[0,1]

His only major asset is shares in an Internet start‐up company. Tomorrow he will learn his stock's value. He believes that it is worth $w₀ with probability 4/5 and $w₁ with probability 1/5, with w₁ > w₀.

1) Calculate the expected value of the lottery, the expected utility, and the utility of the expected value.

2) If w₀ = 1/3 and w₁ = 2/3. Compute the risk premium.

c) Draw a graph for Q2.

Expert Solution

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Rahul Sunny answered 2 years ago

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