Ted is considering an investment project that will give him a wealth of W = 50 if the plan is successful and a wealth of 25 if it fails. The local bank will sell him a certiÖcate of deposit (CD) that will give him a wealth of 40 without any risk.
1. What is Tedís expected wealth if each outcome occurs with an equal probability: (a) 50; (b) 25; (c) 40; (d) 37.5;
2. What probability for the good outcome would make Tedís project have the same expected return as the CD (a) 0.2; (b) 0.6; (c) 0.8; (d) 0.3;
Assume that Tedís utility is given by U = pW :
3. What is Tedís expected utility using the probabilities you found in 2: (a) 5.55; (b) 6.24; (c) 7.23; (d) 8.29;
4. What is the coe¢ cient of absolute risk aversion at W = 50: (a) 0.07; (b) -0.0001; (c) 1.07; (d) 0.01;