Are the following true, false or uncertain? Explain why.
a. Many people buy insurance against their home burning down and also purchase lottery tickets for large prizes. (The insurance and lottery tickets both have negative expected value.)
These people cannot be maximizing the expected utility of their wealth.
b. Jenna owns $5000 worth of Microsoft stock and no other stocks. She is deciding whether to invest another $5000 from her chequing account in General Electric stock. If Jenna is risk averse, she should buy the General Electric stock in order to diversify her portfolio.