Question: Consider the quadratic VNM utility function U(w) = a + bw + cw2.
(a) What restrictions if any must be placed on parameters a, b, and c for this function to display risk aversion?
(b) Over what domain of wealth can a quadratic VNM utility function be defined?
(c) Given the gamble
g = ((1/2) ο (w + h), (1/2) ο (w - h)),
Show that CE < E(g) and that P > 0.
(d) Show that this function, satisfying the restrictions in part (a), cannot represent preferences that display decreasing absolute risk aversion.